What’s the best way to take out the trash?

Published 10:32 pm Wednesday, October 15, 2014

Garbage would normally put most readers to sleep, but Pike County’s contract with Advanced Disposal has been news this summer. Our county offers a contrast in garbage, as the city of Troy has municipal disposal, while the rural areas of Pike County have a privatized service.

Economists have studied trash disposal for years, including Troy University alum Manuel Johnson, who examined the market in Fairfax County, Virginia, while a professor at George Mason University. Research on the privatization of trash disposal is clear: for-profit businesses more efficiently take out the garbage. Studies in the U.S. and Canada found cost savings of 30 to 50 percent with privatization, and for comparable or better (meaning more frequent pickups) service.

The profit motive and the challenge of managing costs explain privatization’s performance. Profit is whatever revenues a business has left over after paying costs. The market does not guarantee owners a profit, but owners can keep whatever profit they make. No comparable ownership of leftover revenue exists in government; Mayor Reeves and the city council do not get to keep any surplus generated by Troy’s trash service.

Sign up for our daily email newsletter

Get the latest news sent to your inbox

Effectively managing costs is enormously challenging. Every day actions by employees and decisions by supervisors determine costs. Control requires diligence on the part of managers and ultimately owners, and can be frustrated by external factors. And simply keeping costs as low as possible is not always best for business; sometimes it is better to pay overtime to pick up customers’ trash when a truck breaks down.

City supervisors undoubtedly try to be responsible with our tax dollars, so this analysis is not meant as a criticism. Government has very different rules for purchasing and personnel. Managers from business might not control costs as well as city officials do if they had to navigate public sector rules.

Privatization actually encompasses several options for taking out the trash. Pike County has an exclusive contract with Advanced Disposal. Another option allows two or more companies to serve an area and relies on competition to keep the price down. A third option is a true market, with companies free to enter or leave based on profitability. Fairfax County, Virginia, had 29 companies offering trash disposal at the time of Dr. Johnson’s study, with many residents able to choose among five or more companies.

Public officials negotiate the terms of service on behalf of residents in an exclusive contract. An exclusive contract offers potential savings from “economies of density” in trash hauling, and so a company might offer better rates if they can serve all of rural Pike County. The downside is a lack of any option for residents unhappy with the contractor’s service. The consumer’s power in the market is the ability to go elsewhere.

The form of privatization should consider whether residents are legally required to purchase the service. The option not to buy at all is a part of the consumer’s market power. If legally required to buy, residents could effectively be held hostage if only one company services their neighborhood.

Normally the freedom to choose “none of the above” is uncontroversial, but trash poses a challenge because of the potential for unsafe or illegal dumping. Trash today goes to sanitary landfills with elaborate engineering to prevent groundwater contamination, fires, and odors. Hauling trash to a landfill for safe disposal is costly. Residents might choose no service with the intention of illegally dumping their trash. Letting residents opt out and face fines for improper dumping might seem like a solution, but policing garbage disposal can be very difficult. Some residents might want to opt out and burn their trash instead, but burning raises air pollution and fire risks. The policing difficulties provide a good rationale to require residents to contract with a company we can trust will take their trash to a landfill.

While professors often like to tell people what they should do, good economists understand that policy decisions must reflect people’s values. Economists can typically only help people make better decisions. Hopefully what economists have learned about trash disposal can help Pike County.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.


About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

email author More by Dan