Public Comment

Berkeley's Refuse-Recycling Budgeting and Fiscal Planning Reflects A Failure in Economic Thinking

Bruce A. Smith, Ph.D.
Thursday March 11, 2010 - 05:51:00 PM

Berkeley's refuse-recycling budget deficit has been on the minds of a growing number of people, including me. Stories have appeared in the Planet and other newspapers about the topic. Based on what I've read, it appears public decision-makers are economically clueless in Berkeley.  

From information provided by Berkeley's Public Works Department (BPW), the single biggest factor in the City's announced $10 million budget deficit is a $4 million shortfall in its refuse-waste collection revenues caused by "recycling's success." From my examination, and more importantly, my understanding of economics, I'd say the Berkeley staff's conclusion is wrong and suffers from a failure to consider three inter-related and fundamental economic concepts: the Law of Demand; Price Elasticity of Demand; and the Substitution Effect.[1]  

Berkeley is one of the last cities in the Bay Area that still collects its own garbage and refuse. Berkeley subsidizes its noteworthy recycling activities through its refuse fees/revenues and the commodities' resale values. To encourage recycling, Berkeley has yet to directly charge a fee for any customer's recycling.  

When it realized that a deficit was likely, what did the city do? Its key response was to raise three of its waste disposal rates. Last August, we residents of Berkeley were whacked with a 20% rate increase for "refuse collection" that includes waste and recycling removal once a week. Commercial refuse fees were increased 20% with a separate 10% rate hike in transfer station (dump) fees. With these significant rate increases, the BPW folks guilelessly expected to raise department revenues by $5.73 million. The BPW and other city budget decision-makers apparently mistakenly believed the Law of Demand, its corollary Price Elasticity of Demand and the Substitution Effect didn't apply to their service. Wrong. 

When the Berkeley refuse fees were dramatically increased, I and other residents called the BPW and got rid of our larger waste container and substituted a smaller one in its place to mitigate the higher fees. As a result of these fee hikes, refuse-recycling revenues plummeted. Residential revenues got only 50% of the increase that the city forecast. Commercial collection got even less, about one-third; and the Berkeley transfer station lost $70k, instead of increasing revenue by $1.35 million. Oops.  

The city discovered that demand for its refuse services is more price elastic than it assumed. Residential customers took advantage of the city's options and reduced their bin size, thereby cutting refuse revenues. Some commercial customers contracted their refuse service to private collectors. Haulers and construction firms, being price-sensitive, went to other transfer stations that compete with Berkeley and to materials recovery enterprises like Urban Ore.  

Unlike others, I believe it's not Berkeley's recycling efforts that are causing this budget deficit, it's the fee increases, contractual lapses and economic climate, a conclusion shared by Dan Knapp, the CEO of Urban Ore in Berkeley.  

What does Berkeley now plan to do? Unfortunately, having previously drunk at the solution spigot of raising prices, the city has, amazingly, stated "rate increases are not being ruled out." [Emphasis added.] Other ideas include picking up trash every other week. I think there's some merit in this idea since it could reduce operating/labor costs (see below) and is a natural result of citizens' increased recycling and composting. Another stated possible idea is to begin directly charging for recycling and composting. Although that may be justified from a cost perspective, it could result in changes in residents' and business' recycling behavior. Sticker shock is always powerful, but especially for items that heretofore have a perceived zero price. If BPW does this, watch a growing number of Berkeley citizens avoid city recycling and sell those items privately to buybacks.  

I'll add a couple more ideas that the Berkeley budget folks and BPW should seriously consider. First, you should admit you made a mistake last August when you drastically increased refuse rates. Another increase within six or so months of the first will confirm your utter lack of economic understanding of your customers – and could lead, in "death spiral" fashion, to added revenue debasement and customer resentment.  

Second, Berkeley should consider only options that either reduce costs or increase the effi-ciency of its refuse-recycling operations without imperiling the existing private recycling and recovery market here. Because the trash "has hit the fan" budgetarily now, it's necessary to do some effective out-of-the-box brainstorming about real solutions, not the usual fiscal accounting tricks. One area of focus should be reducing operational-labor costs since the City of Berkeley pays its employees quite well and provides benefits richer than most private employers. [2]  

Finally and perhaps most importantly, Berkeley's budget decision-makers should be required to attend and pass a Principles of Economics course so they can do their jobs more properly and systematically. They'll learn there is a demand-side of every market (including refuse-recycling services) that needs to be considered. We customers who demand such services behave in ways consistent with the Law of Demand and always have options for substitution. Further denying the Law of Demand and the Substitution Effect will result in yet another example of that most powerful law of economics (and politics), the Law of Unintended Consequences.  


Bruce Smith is an economics and energy efficiency consultant who lives in Berkeley.  

[1] The Law of Demand states if the price of a good (or service) increases, the quantity of that good demanded will de-cline. Price Elasticity is the ratio of the percent change in the quantity demanded to the percent change in the price of the good or service, moving along the demand curve. The Substitution Effect is the change in the quantity of a good demanded as the consumer substitutes a good that has become relatively cheaper in place of one that has become more expensive.  

[2] Public employee pensions have increased significantly over the past decade and represent a huge, growing and mostly opaque cost for taxpayers. This serious cost/budget issue goes beyond waste/refuse/recycling per se. See this for an example of a former Berkeley City Manager who will receive about 108% of his large salary in retirement, a $280,000 pension per year. Many analysts consider such retirement expenses unsustainable without substantial tax increases and/or pension reductions in the near future.