Bag Elasticity

Washington, DC imposed a new five cent tax on plastic bags at grocery stores and other retail establishments this year which was supposed to (a) reduce the amount of plastic bags in the trash and (b) raise funds to pay for the Anacostia River clean-up. As Rebecca at We Love DC notes, it turns out that the price elasticity of demand for plastic bags is incredibly high:

The District’s 5-cent bag tax, which started in January 2010, netted approximately $150,000 during its first month of enactment. According to the D.C. Office of Tax and Revenue, only 3 million bags were issued in the month of January compared to 2009’s 22.5 million bags per month average, and it appears that the new law DC shoppers has been successful in altering shopping bag habits faster than was expected.

As a result, this is actually raising way less revenue than was project. But all things considered, I would say this is a good thing — we’re raising some revenue and drastically reducing the waste of resources. All these bags were being handed out for free, but it turns out that people only actually put a tiny value on access to them.

I think the moral of the story here is about the psychological power of zero. Raising the tax from 5 cents to 10 cents probably wouldn’t change much.