Consumption externalities

The degree of "risk aversion" associated with goods manufactured from some recyclable materials (retreaded tyres, used lubricating oil, etc.) appears to be out of proportion to the actual inferiority of the products relative to substitute goods manufactured from primary materials. In cases in which consumers" preferences are affected significantly by the preferences of other consumers (i.e. consumption externalities), this can undermine the market for recyclables significantly. The cases of retreaded tyres and re-refined oils show this clearly, but it also appears to affect other markets such as recycled newsprint, plastic lumber, etc. Since initial buyers of new products are not rewarded in the market for the information about product quality that they provide to other market participants, there can be barriers to the development of such markets.

There are three other useful roles which public authorities can play in such cases:

  • Serve as a "trusted" source of demand (i.e. in public procurement), demonstrating to other consumers that the two products are functionally identical or at least close substitutes. New Zealand, Austria, the United Kingdom, the Netherlands, France, Turkey, and Korea report having introduced such measures in a variety of waste areas.
  • Ensuring that product standards are based upon performance criteria, and not material (recyclable vs. virgin) content. Efforts to ensure that such biases have been removed are reported for Austria,Turkey, United Kingdom, the Netherlands, and Korea.
  • Provide information on the quality of products manufactured from secondary materials. For instance, both France (www.marque-nf.com) and the Slovak Republic (www.druhasanca.sk) have active programmes in this area. In some cases certificates of quality for goods produced from recyclable materials are provided. The United Kingdom's Quality Protocol in the area of aggregates is one such example.

In many cases government policies may be unintentionally having the opposite effect, undermining confidence in the market.71 In addition, public authorities should be aware of the potential impact of consumption externalities and risk aversion on the market, and avoid using eco-labels which specify recycled material content for affected goods. Even if consumers have "preferences" for the use of recycled material for environmental reasons, in some markets this may be partially undercut by their risk aversion for perceived quality reasons. Without support information programmes, in such cases the positive consequences of the "eco-label" on demand may be undone by the negative consequences.

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