Date: Fri, 16 Sep 1994 01:21:35 -0700 (PDT) From: Alexander Volokh Subject: CEI LIST - STOPPING THE GARBAGE MONOPOLY To: Recipients of the CEI List STOPPING THE GARBAGE MONOPOLY by Jonathan Adler, CEI associate director of environmental studies appeared in *The Journal of Commerce*, 9/2/94 Clarkstown, N.Y., had a problem. Several years ago it built a new solid waste processing facility that would separate recyclable and non-recyclable wastes for transfer to recycling centers and disposal sites, respectively. The facility cost $1.4 million; as a result, the cost for processing wastes at the facility was $81 a ton. This was significantly above the going rate: local waste haulers such as C&A Carbone charged only $71 a ton. To make matters worse, Clarkstown guaranteed the contractor that ran the facility a minimum of 120,000 tons of waste a year over a period of five years. If this target was not met, Clarkstown would have to make up the difference. Rather than acknowledge that they had made a tremendous blunder in agreeing to build the expensive facility, Clarkstown officials came up with another idea: instead of competing for customers, it would commandeer them by government fiat. Clarkstown would pass a "flow control" ordinance that would require all waste within the town limits to use the municipal facility. The law, in effect, established a local waste-processing monopoly, barred all private competition and authorized local officials to fine or imprison those who did not cooperate. When Clarkstown began to prosecute offending companies, it ran into a snag. One of the offending firms, the aforementioned Carbone, decided to sue. Alleging that the flow control ordinance was unconstitutional, Carbone began litigation in 1991 that progressed all the way to the U.S. Supreme Court. Six Justices found Carbone's arguments persuasive and the Clarkstown ordinance was struck down. Now, under pressure from local governments, Congress is considering reversing the Supreme Court's judgment. This would be a costly mistake both for consumers and the environment. The reasoning adopted by Justice Anthony Kennedy in the court's majority opinion was straightforward. Flow control ordinances, he said, are an unconstitutional infringement of interstate commerce. "State and local governments may not use their regulatory power to favor local enterprise by prohibiting patronage of out-of-state competitors or their facilities," Justice Kennedy wrote. Yet that is exactly what Clarkstown sought to do. Under the Commerce Clause of the Constitution, only Congress can regulate or inhibit trade between the states. Clarkstown, and cities in the 27 states where flow control was practiced, need explicit congressional approval if their flow control policies are to continue. Reauthorizing the use of flow control would be a step backward in the handling of municipal solid waste. Rather than encourage expanded markets in waste processing and disposal that would promote greater efficiencies and innovation, flow control establishes protected government monopolies that have no incentive to increase the quality of their waste disposal services. Waste disposal prices would be set by political forces rather than by market competition. Public sector facilities would not have to compete for any of their business. Under this scenario there is little doubt consumers of waste disposal services will pay more, since they would not have the option of taking their business elsewhere when prices get too high. Flow control ordinances can have harmful environmental effects as well by eliminating potential markets for entrepreneurs who develop better ways to recycle or dispose of wastes. At the same time, flow control forecloses opportunities for market-driven recycling and reuse in those few instances where they are economically viable. Rather than holding open the prospect of a profitable market share for developers of cost-competitive recycling techniques, flow control locks in current waste management methods. Many municipalities care about flow control because they made poor investments in expensive and inefficient waste disposal facilities. Prompted by fears of an imminent waste disposal crisis, municipalities overbuilt and issues billions of dollars in bonds to finance incinerators, recycling centers and state-of-the-art waste processing centers. By some estimates, over $10 billion in bonds were issued to finance waste incinerators alone. Without flow control, the operating deficits of these projects will have to be made up from other sources, such as increased taxes or waste disposal levies on households. There is little doubt that residents of many municipalities will end up paying for the mistakes of their elected officials. Many will be quite angry. Flow control provides a way for local officials to hide the costs of their mistakes by forcing private firms to pay more for the disposal of their garbage. The resulting impact on local businesses will often be less noticeable than an overt increase in taxes. Either way local consumers lose; with flow control, however, local officials escape accountability for their errors. There is a way to avoid this mess in the future. Move away from municipal provision of waste disposal services. Flow control is deemed necessary only because municipal facilities cannot compete. These facilities cannot compete because they are products of politics and not the private sector. Even in those cases where private contractors are involved, investment decisions are not made by an analysis of prospective market conditions but rather by what political winds allow. Waste haulers in the private sector must satisfy their customers by providing a better service at a better price. The contractor that ran Clarkstown's facility was guaranteed a market. Absent the pressures of competition, it is no wonder the Clarkstown plant was underbid by a local firm such as Carbone. In cities such as Indianapolis and Philadelphia, local governments are learning the virtues of competition in providing municipal services, and how expanded private sector involvement benefits local consumers. It is ironic that Congress would try to short-circuit that process through legislation. Yet that is exactly what congressional authorization of flow control would do. Consumers benefit without flow control because the resulting competition drives down disposal sites. Environmental effects are reduced as competition spurs innovation and greater efficiency. All flow control brings is less local government accountability and an increase in bureaucratic waste. _______ __________ ___________ / | / | | | |__________ | | | | \ | | \ _______ |__________ ___________ COMPETITIVE ENTERPRISE INSTITUTE 1001 Connecticut Ave. NW #1250 Washington, DC 20036 202-331-1010, fax 202-331-0640 cei@digex.com Permission to copy granted as long as these lines are left intact. To subscribe to the cei list, send a message to volokh@netcom.com. "The Virtual Hand: CEI's free-market guide to the information superhighway" is available for $5. CEI's monthly newsletter, "CEI UpDate," is free to contributors of $25.