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Recycling Economics: Learning The Basics

May 1, 1994

6 Min Read
Recycling Economics: Learning The Basics

Jim Morris

As government budgets tighten and the cost of being "green" rubs against the reality of rising taxes, recycling coordinators increasingly are under fire to justify their programs as cost-effective alternatives to waste disposal methods such as landfilling, incineration and composting.

Recycling, in general, has been criticized by free-market advocates and think tanks. To understand and respond to these critics, recycling coordinators need to become familiar with accounting, marketing and economics as well as special topics such as break-even analysis, sales forecasting and even negotiating skills.

Examining how markets determine prices and quantities is important. Business booms and recessions, changing consumer tastes, new entrants into the market and changes in technology can affect recycling supply and demand.

For example, a hypothetical supply and demand curve (see chart) shows how the intersection can determine market price and the quantity sold for a hypothetical market.

In this case, supply and demand intersect at a price of $25 per ton, which clears the market because total quantity demanded by all buyers equals the total quantity supplied by all sellers. Here, 50 tons per year would be sold.

This simplified model was based on a market of three buyers and two sellers. In a real market, these total quantities may be the result of individual decisions made by millions of buyers and sellers whose preferences are difficult to quantify or estimate.

Marginal Cost Analysis Marginal costs, the additional costs incurred when pursuing a new project or policy, can be described as "the mother of all economic concepts."

For example, consider the following scenario: A New Jersey recycling coordinator is under pressure from the public works committee to cut plastics recycling, which costs the town more than it spends to landfill the material. The committee chairman cites the coordinator's own statistics to prove his point.

With curbside, commingled collection of five commodities (newspaper, glass, aluminum cans, steel cans and plastics), the town recorded $156,240 in costs - or an average of $31,258 per commodity. Since only 90 tons of plastics were collected, the cost per ton is almost $350 to collect. The town sends commingled recyclables to a material recovery facility, which neither pays for nor charges the town for the material.

Even with a typical New Jersey garbage tipping fee of $100 per ton, plastics recycling is not cost-effective, according to this method of average cost accounting.

But using marginal cost accounting, a different picture and a different policy recommendation emerge. Marginal cost analysis asks the question, "What costs will decrease if plastics recycling is eliminated?"

In this scenario, the town recorded the following costs:

* Coordinator salary: $36,000

* Part-time secretary: $14,000

* Hourly labor: $40,000

* Equipment: $40,000

* Operation: $6,240

* Administrative overhead: $10,000

* Total: $156,240

If plastic materials were cut from the program, fixed salary costs would not change; equipment costs would stay the same because the same trucks would be used; overhead would not decrease; and operation and maintenance would not change noticeably since the trucks would have to cover the same routes.

Decreasing hourly labor can save money. Eliminating plastics could make collection times shorter. Fewer households would set out more than one container, and some might set out every other collection. Using this scenario and a local community's numbers, the yearly labor savings can be estimated at $3,120.

With 90 tons collected, this method produced a savings of $35 per ton, which is an attractive alternative to paying a disposal fee of $100 per ton to throw it all away.

This case illustrates two equally honest ways to determine the cost effectiveness of one policy option as well as two entirely different policy recommendations.

Break-Even Analysis In the marketplace, businesses live and die by their ability to play the risk-return game of break-even analysis. Costs may be easy to quantify, but revenue forecasts are seldom a sure thing.

Recycling coordinators often go through a similar analysis, except their return is usually measured in avoided costs rather than sales revenue.

To illustrate the point, consider the following example. A New Jersey town was considering buying a grass mulching machine for $50,000, and they estimated that another $4,000 would be needed to explain the program to residents. Without a grass mulching project, the town would continue to pay $100 per ton to landfill. The project would allow the town to compost its grass at a nearby facility charging $40 per ton.

To calculate break-even levels:

* Divide the total fixed costs by revenue per unit;

* Then subtract the variable cost per unit.

In this case, while the project produces no revenue, it avoids the landfill cost of $100 per ton. Therefore, to determine the break-even level for this project, divide the total fixed costs ($54,000) by the avoided landfill cost per ton ($100) minus the cost per ton to compost ($40). This figure equals the number of tons required to break even, which in this scenario is 900 tons.

These simplified examples are designed to illustrate powerful tools that form the basis of good policy analysis - and of good business.

In recycling commodity markets, it is important to be an informed buyer or seller. Gather pricing information and learn how to use it to negotiate. Recycling economics courses are available to help coordinators master the business skills they need to make recycling a cost-effective option for handling waste in their communities.

In a New Jersey classroom, recycling coordinators are honing their skills as economists, accountants, marketers and consultants.

Although most participants are government employees who run community recycling programs, in class they are manipulating the tools of small business. By applying techniques like marginal cost analysis, they are pursuing strategies to help them run effective and efficient recycling programs. About 20 percent of the participants come from private companies, but they are seeking the same goal - to maximize material recovery and minimize costs.

By the end of June, almost 150 solid waste professionals will have completed this five-day "Understanding Recycling Economics" course offered by Rutgers University's Cook College. The course is part of the Recycling Certification Series, an eight-course, 25-day voluntary training program that is sponsored by the New Jersey Department of Environmental Protection and Energy and presented cooperatively with the Association of New Jersey Recyclers. The first 67 graduates of the program received their certificates in November.

The exercises involved in the course are not just academic. To complete the class, registrants must do a full-cost accounting analysis of their own recycling operation and calculate the total cost or savings to the community.

By the end of the course, each participant must gather the data and crunch the numbers, as small business operators do, to turn a profit. However, recycling coordinators fully understand that out-of-pocket costs may exceed any revenues they generate from their curbside recycling collection programs.

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