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THESIS
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LIBRARY
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3 1293 020489

 

 

This is to certify that the

thesis entitled

Solid Waste Collection:
Institutional Analysis and Case Study
Delhi Township, MI

presented by

Steven B. Duprey

has been accepted towards fulfillment
of the requirements for

M. S . degree in Agricultural
Economics

 

Major professor

Date June 8, 2000

 

0-7639

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PLACE IN RETURN BOX to remove this checkout from your record.
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Solid Waste Collection: Institutional Analysis and Case Study
- Delhi Charter Township, MI

By

Steven B. Duprey

A Thesis

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

Masters of Science
Department of Agricultural Economics

2000

ABSTRACT

Solid Waste Collection: Institutional Analysis and Case Study
-Delhi Charter Township, MI

By

Steven B. Duprey

Competitive market provision of traditionally publicly provided services is
widely viewed as the preferred policy option for communities. However, the
dichotomy of public versus private provision of solid waste collection is
incomplete and value laden. This analysis focuses on the economic
characteristics of solid waste collection and lays forth the full spectrum of policy
alternatives and associated policy outcomes. The case study is of a community
utilizing the competitive market for collection services. Forced to cope with
pecuniary and aesthetic extemalities as well as excessive road damage due to a
multiple provider collection system with non-contiguous routing, Delhi Charter
Township is faced with a choice between those preferring low unit cost and those

desiring variety and choice.

To my wife, Zandra.

ACKNOWLEDGMENTS

I would first like to thank Delhi Charter Township, the Township Board and
Township Manager John Elsinga. Allowing me to conduct this case study
afforded me a wonderful opportunity to develop personally and professionally
and for that I am appreciative. I

Two of my committee members, Professor Kenneth VerBurg and Dr. Allan
Schmid, provided valuable insights on my work and made sacrifices of time and
energy to assist me, so I thank you both. Dr. Schmid was instrumental in
developing my analytic skills and training me, as both economist and citizen, to
view the world in new ways.

My major professor and mentor, Dr. Lynn Harvey is the main reason I
have reached this point. As teacher, employer, counselor and friend, I am deeply
indebted to Dr. Harvey and hope to prove worthy of the investment made in me.

Finally, without the sacrifices of my wife, Zandra. my graduate education
at Michigan State University would not have been possible. For putting your

dreams on hold so that I might obtain mine, I am forever grateful.

TABLE OF CONTENTS

INTRODUCTION 1

CHAPTER ONE—BASICS OF SOLID WASTE COLLECTION 3
1.1 History 3
1.2 Modern Management System 5

CHAPTER TWO—ECONOMICS OF SOLID WASTE COLLECTION 8
2.1 Economies of Scale 8
2.2 Economies of Contiguity 12
2.3 Additional Conceptual Issues 16
2.3.1 Incompatible Use Goods 16
2.3.2 High Exclusion Cost Goods 17
2.3.3 Financing Road Repair 19
2.3.4 Variety versus Cost 21
2.4 Empirical Review 22

CHAPTER THREE—SOLID WASTE COLLECTION IN DELHI CHARTER
TOWNSHIP 26

3.1 Objectives 27

3.2 Framework of Analysis 28

3.3 Methodology 29

CHAPTER FOUR—DATA AND OUTCOMES 31
4.1 Excess Route Mileage 31
4.2 Marginal Cost Per Mile 33
4.3 Pecuniary Extemalities of Non-Contiguous Routing 35
4.4 Road Deterioration 41
4.5 Summary of Results 44

CHAPTER FIVE—PUBLIC POLICY ALTERNATIVES 46
5.1 Institutional Framework 46
5.1.1 Situation 47
5.1.2 Structure and Performance 50
5.2 Public Provision 50
5.3 Competitive Market Provision 53
5.4 Regulated Market Provision 56
5.4.1 Competitive Contracts 56
5.4.2 Franchise Arrangements 57
5.4.3 Market Segmentation 59
5.5 Rules for Making Rules 59
5.6 Future Research 61
5.7 Concluding Comments 62

Appendix A: Sample Data 65

Appendix B: Obtaining Marginal Cost Per Mile of Excess Collection 67
Appendix C: Costs and Benefits of Shift to One Provider System 70
Appendix D: Gains From Economies of Contiguity 71

Appendix E: Levels of Service in Delhi Charter Township 72

Appendix F: Sample Data From Holt Rd./Aure|ius Rd.NVilcox Rd. 73

Bibliography 75

vi

LIST OF TABLES

TABLE 1: COMPONENTS OF A SOLID WASTE COLLECTION SYSTEM 6

TABLE 2: MARKET SHARE FROM THREE NEIGHBORHOOD SAMPLE 31

TABLE 3: WEEKLY ROUTE MILAGE IN SAMPLE NEIGHBORHOODS 32

TABLE 4: ROUTE MILES IN EXCESS IN DELHI CHARTER TOWNSHIP 33

TABLE 5: COST PER MILE OF EXCESS ROUTE MILEAGE 35

TABLE 6: FIRM X GAIN FROM A SHIFT TO A SINGLE PROVIDER COLLECTION SYSTEM 36
TABLE 7: ADDED COSTS TO FIRM X UNDER SINGLE PROVIDER COLLECTION SYSTEM 37

TABLE 8: ESTIMATES OF COST INCREASE ACCRUING TO FIRM X UNDER SINGLE
PROVIDER COLLECTION SYSTEM 39

TABLE 9: UNIT PRICE AND ESTIMATED PROFITS UNDER A ONE PROVIDER SYSTEM 40

TABLE 10: COST OF PAVEMENT DETERIORATION FROM EXCESS COLLECTION VEHICLE
TRAFFIC 43

TABLE A-1: SAMPLE NEIGHBORHOOD 1 65

TABLE A-2: SAMPLE NEIGHBORHOOD 2 65

TABLE A-3: SAMPLE NEIGHBORHOOD 3 65

TABLE A-4: ROUTE MILES IN EXCESS IN DELHI CHARTER TOWNSHIP 66
TABLE B-1: FUEL USAGE ASSUMPTIONS 67

TABLE B-2: MAINTENANCE ASSUMPTIONS 67

TABLE B-3: LABOR ASSUMPTIONS 68

TABLE B-4: DEPRECIATION ASSUMPTIONS 69

TABLE D: SAVINGS FROM ONE-FIRM STUCTURE 71

TABLE E: PRICE AND SERVICE OPTIONS 72

vii

INTRODUCTION

Solid waste collection is not often viewed as a subject worthy of
consideration until a crisis arises, such as contract negotiations with unionized
sanitation workers or delayed collection due to national holidays. While many
communities are satisfied when solid waste collection is within budget or service
is consistent, others have opted for privatization hoping ‘free-market’ competition
will provide more efficient and effective service. But the question of how trash is
collected, who is collecting it, and at what price is not simply the question of
public versus private provision. Public versus private is a false dichotomy that
fails to recognize the institutional and community variables that affect the
performance of any solid waste collection system.

Most of the debate concerning solid waste collection is centered on the
question of privatization of public services. In fact, many simply assume that
public service provision is less efficient than private provision due to the lack of
competitive market forces. There is a wealth of information on the benefits of
privatization. However, the lack of evidence pertaining to inefficiencies in the
competitive market provision of refuse collection is startling. This analysis adds a
layer of complexity to the solid waste collection privatization decision and should
give pause to those policymakers pushing to privatize other publicly provided
services as well.

Officials in Delhi Charter Township, MI, sought assistance from the
Department of Agricultural Economics at Michigan State University to examine

the costs associated with siting a rural residential recycling center in their

community. The process quickly evolved to include an examination of the solid
waste collection system because of clear linkages with household recycling.

The nature of the problem with solid waste collection is twofold. First, the
economies of scale and contiguity present in the collection of solid waste are a
source of both interdependence and conflict. A set of institutions that fail to
account for scale and contiguity in collection routes will yield higher marginal and
average costs than institutions designed to take advantage of these
characteristics. Second, efficient solid waste collection requires unanimity, either
voluntary, coerced or incidental, without regard to the institutional structure that
brings it about. One service provider must serve each household within a given
geographic area. This poses difficulties when tastes differ or are contemptuous
of governmental regulation.

Chapter one will provide a brief history of solid waste collection and the
components of a modern collection system. Chapter two provides a theoretical
foundation to the analysis as well as a review of empirical work related to solid
waste collection. Chapter three describes the objectives and methodology of the
Delhi Charter Township study. The findings of the case study are detailed in
Chapter four and an institutional perspective to the public policy alternatives

available to local governments is offered in chapter five.

Chapter 1

BASICS OF SOLID WASTE COLLECTION

The usefulness of theory lies in its ability to abstract from specific
problems, observations, and data to uncover fundamental forces often
overlooked. Toward that end, chapter one provides us with a background of
solid waste collection while chapter two builds the economic foundation utilized in
the remainder of this analysis. The economic facts of interdependence that will
be laid forth are the results of the development of human society. That is, people
have evolved socially to live near one another allowing Increased specialization
in economic activities and providing mutual gains from trade. Proximity of
neighbors provides many benefits and opportunities for interaction, yet also
imposes costs. Collection and disposal of solid waste is just one of these. So
before asking how cities, townships and villages should collect solid waste, it is

useful to ask why it is collected at all.

History
One problem with garbage is the space it occupies. As early human
beings evolved from nomadic hunter-gathers to more stationary food growers,
the choice of where to live became very important. Agricultural production
became a more reliable food source and eventually specialization and trade
made humans increasingly dependent on one another. Communities developed

along trade routes and watenNays and the development of cities began.

Population centers continued to grow, and the increased density meant less
space for individuals and their trash. Excavations of domiciles in the ancient city
of Troy found alternating layers of rubbish and clay indicated trash was not
removed from the home, but simply dispersed across the floor and covered with
fresh clay. Eventually, the roof would be raised to accommodate for the lost
space (Savas, p. 11).

There is also ample evidence that early societies recognized the public
health dangers of solid waste. Evidence exists of street cleaning laws in early
Chinese writings as well as the sanitary influence of religious doctrine on Islamic
cultures. Dogs and more often swine were herded through the streets of most
European cities until the mid-nineteenth century. In fact, most collection activities
were performed by scavengers, either human or animal, until organized
management was forced upon city leadership. Modern management of solid
waste is indebted to flies, rats, pigs, odor and smoke (Hickman and Eldredge,
1999). Flies, rats and other vermin were attracted to the open dumpsites, pigs
eventually became ill or developed trichinosis and the open burning of garbage
produce vast amounts of odor and smoke. In addition, the experiences of cities
like New York during the nineteenth century show the devastating consequences
of poor sanitation (Rosner, 1996). Epidemics of cholera and typhoid swept
through the infamous tenement districts causing widespread despair. But public
health conditions were greatly improved when solid waste was collected

regulany. Thanks in part to the US Army’s development of sanitary landfills

(Bjomson and Bogue, 1961) and the growing wealth of this country after WWII,
management practices became cleaner and healthier.

This short historical summary shows solid waste is collected because
human beings are interdependent. Trash left by A will effect B. Rubbish burned
by C will effect A and B. These facts are inescapable when population density

reaches a critical value.

Modern Management System

The modern solid waste system contains five main components:
production of goods, consumption of goods, collection of waste, recycling and
disposal. Many efforts are aimed at reducing the amount of solid waste being
disposed. Some urge less consumption, others desire reduced packaging.
Some think recycling should be mandatory. These attempts to alter one or more
components of the solid waste management system have little or nothing to do
with the collection system. The exception being dual collection, offered in a
growing number of communities, that combines recycling and trash collection in
one vehicle.

The generic details of a collection system1 are described in Table 1. At
some critical value, population densities begin to overwhelm self-disposal options
such as burial or burning. Organization is required and must contain each of the
components listed in Table 1. Who receives collection services is the only
constant. Most human activities produce waste and its removal will always be

needed. All other components are variable, a municipality can provide collection

service and finance it through general tax revenues. Or, a township could
auction a franchise to a private firm to haul waste and directly bill consumers.
The myriad of policy options is discussed in detail in chapter 3.

Two aspects of the collection system not mentioned are the method of disposal
and level of service. From the cost of collection perspective, whether the waste
is sent to an incinerator or landfill, for example, is immaterial.

Table1: Components of a Solid Waste Collection System

 

 

 

 

 

 

 

System Component I Description

Consumer of Service households, businesses, schools, etc.
Provider of Service firms, local governments, self-haulers
Organizing Authority consumer, local governments
Financing Authority consumer, local government

 

That is to say, the physical act of transporting rubbish is uncorrelated with
the manner of disposal, holding distances to the various disposal sites fixed.
However, the price consumers face is affected by the method of disposal and the
structure of the local disposal industry. If financed through user fees, the large
capital investment in a municipal incinerator could substantialy increase the price
of disposal. A private landfill can extract monopolistic rents in relation to the
distance of the nearest competing landfill. These examples increase the price of
disposal not the cost of collection. But because the cost of disposal is

transmitted through the price charged for collection, consumers may interpret any

 

' Adapted from Saves (1977) Table 3-1 pg. 23.

 

price increase as solely an increase in collection costs. Analytically, at least,
these two must be differentiated.

The level of service will have dramatic effects on the cost of collection.
Number of collection days per week, amount of waste allowed per pickup,
whether yard waste or bulk items are collected, and many other service variables
influence the cost. However, this is not what is of interest to this analysis.
Clearly comparing different levels and types of service is an apples and oranges
comparison. The thrust of this analysis is, holding the level of service constant
and regardless of institutional characteristics, the cost of collection will be lower
with one provider servicing a contiguous geographic region, increasing it’s
customer base and/or service area to the physical constraints of the state of

technology.

Chapter 2

ECONOMICS OF SOLID WASTE COLLECTION

The economic theory supporting this analysis is presented in chapter two.
It is crucial to identify the inherent features of solid waste collection not only for
the purpose of assisting Delhi Charter Township, but to allow broad application of
our findings to other good or services with similar characteristics. Additionally, a
theoretical understanding of solid waste collection permits the interpretation of
related literature and empirical work. The lack of specific literature and analysis
pertaining to non-contiguous routing in a multiple provider competitive market

makes theoretical knowledge even more important.

Economies of Scale

In the production of many goods and services, the average cost of
production declines as output increases. This means a proportionate increase in
output is accompanied by a less than proportionate increase in inputs. Goods
exhibit increasing returns due to indivisible inputs when a particular physical
asset is needed to produce output. Or, experience can provide cost savings
when the next unit is being produced. These economies are extracted with
complicated or evolving production processes, like bringing a new automobile to

market. And, as Schmid2 notes certain physical properties can provide

 

2 For example, the volume of fluids passing through a pipe more than doubles as the circumference of the
pipe doubles (p.62)

increasing returns to scale. While there are several sources of economies of
scale, two3 are relevant to solid waste collection.

First, as the number of households serviced by a fixed capacity collection
vehicle increases, the average cost per household falls. Fixed costs are being
spread over larger output amounts, driving average cost down. The truck is, in a
sense, indivisible because while other inputs (fuel, oil, and labor hours) can vary,
the capacity of the vehicle remains fixed.

A slightly different aspect of indivisibility delivering economies of scale to
solid waste collection occurs when additional vehicles are added to the
organizational entity providing the service. A firm or department of public works
needs a management and maintenance infrastructure to operate. The first truck
purchased requires both of these structures in place, while the additional truck
adds minimally to the overhead costs. This assumes there is some range of
capacity that both the management and maintenance portions of the organization
can handle. Over this range, average costs of delivering collection service
declines as the size of the fleet increases. These two sources of economies of
scale in waste collection are both related to the concept of indivisibility because
additional units are being added to a fixed asset. In the first instance, more units
are collected by a fixed capacity vehicle and in the second, more vehicles are
added to a given organizational size.

Second, as the capacity of the collection vehicle increases, more

households can be serviced along a fixed collection route. This reduces the

 

3 One might argue that economics of scale can also be extracted through experience and repetition of
activity, but these would most likely be negligible in solid waste collection and are thus ignored.

9

variable inputs such as fuel and labor required because less time need be spent
traveling to the disposal site. The average cost curve of collection declines as
the capacity of the truck increases. For example, the number of axles on a truck
increase the load it can physically and legally transport (Stems, p53). This is akin
to when increasing the size of a plant reduces the unit cost and a lower point on
the average cost curve is obtained. The following, taken from a recent industry
publication Public Works, refers to the capture of scale economies in Cincinnati,
Ohio:

“Over the planned six-hour route-days, each older packer (500-Ib/yard
compaction) and its two-person crew collect two 10,000-lb loads per day to
service 700 to 800 stops. Each newer packer (1,000 lb/yard compaction) and the
same two—person crew services the same 700 to 800 stops in one 20,000-lb load
daily.”

The older packers (vehicles that can compact trash hydraulically) and the
new packers were both rated at a 20-yard capacity, a measure of volume. But
the new vehicles could physically shrink the size of the trash collected allowing
the weight of each disposal trip to double. This lowers average cost of collection
by reducing unproductive drive time.

What issues are brought about by the economies of scale identified in
solid waste collection? The overriding issue is interdependencies. When
consumers are free to choose which firm they buy from, the price each pays is
affected by the choices of everyone else. Imagine a neighborhood with ten
homes that has the option of connecting to the nearby sewer lines. Some want

desperately to connect to the municipal sewer system, while others are resisting

the change. Further, suppose sewers will not be extended unless a simple

10

majority of homeowners agree. Whatever the outcome, the ‘price’ each pays,
either through being denied the benefits of the sewer connection when you want
them or having to pay for the connection when you don't want it, is determined by
the preferences of others. The same is true for solid waste collection. If in that
same neighborhood, eight homes choose firm A and two choose firm B, the
difference in preferences causes everyone to pay higher collection prices. Similar
tastes would yield unanimity in firm choice, and each would pay a lower price
because the increase in firm output (collection units) is accomplished with less
than proportionate rise in costs. The possibility exists for the firm to lower the unit
price and still maintain profit levels. But with variety in preferences, two trucks,
two crews and additional fuel is needed to haul trash for this neighborhood.
Schmid (pg. 64) summarizes the issue well with “The fulfillment of tastes is
affected by who shares your tastes.”

When local governments restrict individual choice through contracts,
franchises or self-production, citizen interdependence is not removed, but simply
altered. In such cases, preferences and tastes still need to conform to affect
policy change and reach economies of scale. However, it is assumed a much '
lower hurdle need be overcome than under a free market choice scenario. The
difference is that ensuring and enforcing unanimity of firm selection is cheaper

when government is responsible than when it is left to neighbors.

11

Economies of Contiguity

Stevens and Edwards have defined the increasing returns related to
contiguity as those economies derived from the alignment of customers along a
service route. (Savas, p 150.) If truck A passes by a home along an existing
collection route, it is less costly to society for that house to be serviced by truck A
than by another truck. While this is clearly true, it becomes more relevant to solid
waste collection when combined with Schmid’s concept of superordinary
economies of scale ( Schmid pg.69). In truth, superordinary economies of scale
is just a re-labeling of the more prevalent term natural monopoly. Both imply a
market whose output is produced at the lowest cost when it is controlled by only
one firm (or public entity). Natural gas and electricity are most often identified as
natural monopolies.

But even these examples are limited by the size of the market under
consideration. One company does not control the entire electricity industry in the
US, even though many localized natural monopolies exist. They are limited
(and in some cases created) by technology, topography, organizational
inefficiencies and government regulation. Because of the properties associated
with contiguity and increasing returns, solid waste collection exhibits
superordinary economies of scale in localized markets. That is, the localized
market for solid waste collection reaches the lowest point on the industry cost
curve when one firm/entity captures the whole market. A localized market for

collection is defined as the combination of geography, population density, and

12

average waste production associated with the physical constraints on technology
and organizational constraints on efficient management.

It is now offered, with evidence provided in the section on empirical
studies and in chapter 2, that the increasing returns to the proximal arrangement
of solid waste collection is unambiguously less costly than multiple provider
systems. This outcome must be tempered by the facts associated with
monopolistic power. The usual neoclassical analysis of monopolies predicts an
outcome with output too low and price too high. This is because monopolists
maximize profit when producing the output at which marginal revenue equals
marginal cost. Since they face downward sloping demand, price exCeeds
marginal revenue and marginal cost. This difference over the quantity produced
yields monopoly rents.

It is a safe assumption that most natural monopolies face downward
I sloping demand curves in the long run. Changes in consumption behavior and
development of viable alternatives would likely cause the demand for a
monopolist’s goods to fall as long-run prices increase. For example, the
development of more fuel—efficient vehicles was in part due to dramatic increases
in gasoline prices here in the US. by the OPEC cartel’s supply control measures.
Exerting their considerable market power, OPEC brought about an eventual
change in consumer demand for fuel.

Usually, goods exhibiting superordinary economies of scale are capital
and infrastructure intensive. That presents substantial barriers to entry.

(Nicholson, pg. 547) However, solid waste collection does not require the

13

 

fF‘IITZ.

massive investments in infrastructure and the physical capital needed is small ‘
relative to other natural monopolies. For these reasons, a firm could not extract
huge monopoly rents over an extended period in a localized collection market.
Barriers to entry are relatively low and if predatory pricing is disallowed new firms
could compete not for individual customers, but for the entire localized market.
The entire market must be organized for firms to compete and for communities to
accept bids. Thus, some form of collective action is needed to bring about
unanimity.

A word needs to be said regarding the apparent conflict of actual
conditions in Delhi Charter Township and the suggestion of localized
superordinary economies of scale. If in fact the market reaches it’s lowest
average cost with only one firm, why do we currently find three operating? While
avoiding the unique characteristics of this case, we can identify three possible
explanations.

One, the market is in disequilibrium but moving toward a stable
equilibrium. What we now see is just a snapshot of the market, but perhaps the
whole picture will be revealed in the long run to find one firm prevailing. This fails
to explain the persistence of multiple provider non-exclusive collection
arrangements, like the one found in Delhi.

Two, the firms and their customers have relationships that are not easily
swayed by price. Loyalty to the firm or fear of disrupted service could prevent the
selection of new service providers. Another aspect to this reluctance to switch

providers is the required purchase of the trash receptacle. The price of the trash

14

bin represents a hurdle to weed out those who would change providers often.
After all, new customers may mean altering the route structure, which can be
costly to the firm if done frequently. The purchase of the bin is also a
psychological barrier to prevent switching from your current provider. Even the
rational economist can find sunk costs hard to ignore.

Or three, there is no institution to bring about such coordination. With
most other goods displaying increasing returns to scale purchases need not be
location specific. Firms have a variety of locations at which marketing can be
targeted and purchases can rise to capture the scale economies present. Solid
waste collection firms must increase their output along specific collection routes
to have returns increase. This is compounded by the firm’s pricing problem. Do
finn’s first lower price to attract more customers or build a larger customer base
and then lower price? If firms lower price first, revenue falls, but advertising
expenses aimed atpotential customers will lower profits as well. Through it all,
the level of service must be maintained to keep current clients satisfied.

To summarize, economies of contiguity suggest localized solid waste
collection markets exhibit superordinary economies of scale whereas reaching
the lowest point on the market cost curve requires one collection entity. The
localized collection market is defined as the unique combination of service area,
customer density, and transportation technology that permits full exploitation of
scale and contiguity economies. Monopoly power within localized markets is
combated with competition for the entire market through auctioning franchise

rights or bidding out contracts. If a community wishes to achieve these

15

economies, it will undoubtedly be forced to chose the preferences of one group

over another.

Additional Conceptual Issues

If a community fails to reach economies of scale, the outcome has mainly
pecuniary impact. That is, unit costs are higher for everyone. But if collection is
such that economies of contiguity are ignored, additional costs are imposed. In a
multiple provider solid waste collection system, the excess miles driven by the
second or third garbage truck (when only one truck is necessary) can cause
substantial road damage. And if trash is collected on several different days, a
neighborhood is subject to a less aesthetically pleasing environment than that
produced under a one provider collection structure. The aesthetic loss is a result
of being subject to multiple days of collection vehicle traffic and visually
encountering trash receptacles more frequently. This loss clearly can not be
quantified, but communities with blight laws, for example, attach some value to
having visually appealing surroundings. More generally, people labor to beautify

their home with fresh coats cf paint and landscaping for similar reasons.

Incompatible Use Goods
Four other theoretical concerns must be addressed with a multiple
provider collection system. While there are varying degrees of road quality and
aesthetic quality, only one type can exist at a given point in time. Goods that

have multiple uses or classes, which are each incongruent with the others, are

16

 

said to be incompatible use goods (Schmid, 1987). Roads and aesthetics are
such goods. We must define who has property rights over roads and aesthetics
in order to determine the quality that will-be provided. An interstate highway is
wholly incompatible with a gravel road or a cornfield. The land upon which the
road is-built can not be put to more than one use and the competing interests
must be ranked. Which use wins is determined by who has ownership rights.
For a city or township faced with a multiple provider collection system, a
determination must be made as to the ownership of roads. If those preferring
high quality roads have property rights, a single provider system will be
implemented. On the other hand, if property rights are dispersed in another
fashion the multiple provider system may be the outcome.

The crucial fact to remember with incompatible use goods is that whoever
has the property rights will determine the resource use. With solid waste
collection specifically, if excessive road damage and aesthetic loss occur we can
say those preferring variety and choice in solid waste collection own these
resources. It should also be noted that aesthetic loss, unlike measurable road
damage, is closely linked to personal values and attempts to quantify it should

reflect this fact.

High Exclusion Cost Goods
The second issue arising from multiple provider collection systems is a
theoretical reason for the lack of consensus in group decisions. High exclusion

cost goods are those goods where the costs of precluding unauthorized use is

17

 

high. This should be distinguished from public goods (or Schmid's joint-impact .
goods) that are nonrival in use. This means if the good or service is produced, it
is available to all and the marginal cost of another use is zero. High exclusion
cost goods differ from public or joint-impact goods in that the marginal cost of
another user is not zero. Consider rush hour traffic. It would be very costly to
exclude any individual from using the streets who does not contribute to their
production. The problem lies in the marginal cost additional vehicles impose
during rush hour. Additional users occupy the roads and prevent other's use or
at least increase the cost of use for others. Thus, use of the road is rival in use
and not a public good.

The free rider problem is always present with high exclusion cost goods.
Free-riders use a resource and do not contribute to it’s production or bear costs
associated with the resource. Here, individuals utilizing a resource without
paying are either hard to detect or hard to deter. Often left out of traditional
treatments of public goods is the counter piece to the free rider, the unwilling
rider (Schmid, pg. 49). If a gasoline tax is used to fund traffic easing measures in
congested urbanized areas, all gasoline buyers must pay the tax whether they
add to the traffic congestion or not.

Unlike incompatible use goods, simply defining property rights will not
resolve this conflict. For instance, the existence of a national defense system
provides protection for everyone within that nation whether they contribute with
taxes or not. Similarly, ensuring roads are of high quality or aesthetic value is

difficult because people can enjoy the benefits without contributing to their

18

 

production. In the free-market scenario with a single provider, one can choose
an outside firm, and still enjoy the majority of benefits her neighbors choices, i.e.
high aesthetic values and good roads. It is impossible, or at least prohibitively
costly to prevent the dissenter from benefiting or to force contribution..

This is more generally a problem of collective action. As Mancur Olson
(1965) asserted, as the size of group increases, the difficulty in achieving the
common interest increases. Two main reasons explain this phenomenon. First,
with larger groups the share of benefits is small for each member and second,
organizational and transaction costs increase. So it is costly to initiate and
maintain consensus in larger groups unless each member can receive selective
benefits while non-members receive none. This result is suggestive of some
form of coercive power to achieve the economies derived from a single collection
agency in localized markets. That said, if economies are not reached, some in
the community are ‘coerced’ into paying higher unit costs than necessary.

When utilizing the concepts of high exclusion cost and incompatible use
good it is important to identify the good under analysis. Both are irrelevant if we
are speaking of solid waste collection itself. However, they become extremely
useful when the object of examination is the road damage from excessive truck

traffic or loss of aesthetic quality from more frequent sightings of trash bins.
Financing Road Repair

How communities choose to finance road repair is the third theoretical

consideration. Because collection vehicles can cause deterioration of local

19

streets, excessive collection traffic can impose additional costs beyond those
paid by customers. These added costs are imposed upon society and are not
reflected in market prices. Entities (individuals, firms, governments) engaging in
transactions with extemalities create an artificial equilibrium. With negative
extemalities, like road damage in this case, too much of the good creating the
external effect is produced. A tax set at a rate equal to the marginal social cost
of collection is one solution set forth by Pigou (Rosen, pg.94). Referred to as
‘internalizing an extemality’, this tax would shift the supply curve to the left
causing demand to fall and price to rise. If communities had a formula to charge
each resident the cost of repairing road damage resulting from their choice of
waste hauler, then the full cost of their decision could be known. There is no such
formula so the question of who should pay for what road damage is an
interesting one.

Governments generally have two ways to finance activities, through
general tax dollars or special assessments. Funding repair projects with general
tax dollars is how most roads are improved. This is due to the high exclusion cost
aspect of streets. It is administratively impossible to use assessments, tolls or
other mechanisms to pay for road work. The exception being when the
beneficiaries of a project are identifiable and represent a sub-group of the
community. A dead-end residential street is a good candidate for special
assessment when road repairs are needed. Users are identifiable and should be

willing to contribute because they are the sole beneficiaries of the improvements.

20

 

If the entire community benefits, each member should contribute and therefore
general tax dollars should be used.

The relevance to solid waste collection is that general tax dollars do not
induce citizens to alter their choice of collection agency. Those who chose to
dissent from the majority’s selection by employing an ‘outside’ firm can not be
made to pay for the additional costs their actions impose, either pecuniary or with
regard to road repairs. Yet even a pricing institution that can discriminate
between dissenters and those subscribing to the majority selection might not
reduce the aesthetic damage. If the dissenters preferences are strong enough,
he will pay the added costs he imposes but unless property rights are assigned
to aesthetic views, garbage bins will be more prevalent than a one-provider
collection system. If the owners of pleasing views are determined to be the
dissenters, the majority can either gather a bid and buy out the dissenters or the
majority can petition government and affect change democratically. However, the

majority faces the same pitfalls of collective action mentioned previously.

Variety versus Cost
The last concept important to this discussion could fit with the earlier
topics of economies of scale and contiguity. It is the tradeoff between variety and
cost and it warrants it’s own treatment because it acknowledges human values.
It'also gets to the heart of all economic activity. Humans enjoy variety and
uniqueness in almost every marketable item. Having hundreds of choices in

automobiles and thousands of choices in food imposes costs on society. But the

21

 

sea of products on the market provides people with a means to satisfy their
individual tastes. Science could develop some bland pelletized kibble to meet
our physiological requirement of vitamin and minerals, but most people wouldn’t
be happy. Economists and policy makers should not forget this. Even with
something as undifferentiable as picking up trash and hauling it away, people
may desire choice. One of the duties of policy makers is to order these desires
and preferences when they are in conflict. With some goods and services,
variety is too coStly whereas with others people are willing to pay more for it.
Part of the reason for this analysis is to determine just how costly it is to have
variety in solid waste collection so that, with this information, Delhi Charter
Township and other communities can be begin to think deeply of the

consequences that flow from individual choice.

Empirical Review

The earliest study of solid waste collection was conducted by Hirsh
(1962). The motivation for this work was determining the cost functions of the
public provision of solid waste collection. The findings are not generally
applicable since the focus was on service level, not market structure. However,
two interesting conclusions were put forth. Economies of scale were not found,
but part of this was due to the misalignment of municipal and collection
boundaries. That is, firms operated collection routes in more than one city. So
from the company perspective, they may well have achieve economies of scale,

but the study could not make this determination. Secondly, the point is made

22

that these types of studies are simplified by the “relatively few external effects” of
waste collection. Yet pickup density is found to have significant effect on the cost
of collection. This is a contradiction that becomes apparent when two or more
collection agencies operating in non-exclusive areas. With non-exclusive routing,
pickup density is decreased, unproductive driving time is increased and per unit
costs rise. This price increase is a pecuniary extemality and is ignored by Hirsh.
This either shows a lack of understanding of the institutional impacts on cost or
collection is assumed to occur with contiguous routing. However, no mention is
made of returns to contiguity. This entire chapter aims to show ‘external effects’
do exist and to illuminate their underlying economic causes.

Edwards and Stevens (1976) present data showing the cost savings to
economies of scale and contiguity. Market structure is found to have significant
price implications. Specifically, they attribute a 10 to 41% cost reduction to
government intervention that creates a one-provider collection system. The 25
year old study included 77 cites and compared cities with contracts to cities with
either franchises or ‘unregulated’ private markets. Contiguity is found to be more
significant than scale, offering cost savings to cities regardless of their size.
Achieving these cost reductions is possible with a competitive bidding process or
through some price regulation mechanism. An interesting finding is that billing
costs can represent between 15% and 24% of total collection costs per
household for franchises and only 3% for municipal providers. Local
governments can issue one bill, collect fees and charges for several services

while lowering average billing cost.

23

Two years later, Stevens authored another study that is as close to this
analysis that the literature provides. In “Scale, Market Structure and the Cost of
Refuse Collection” (1978), she argues that a competitive market is considerable
more costly per unit than a monopoly arrangement. The majority of the
difference in cost is attributed to economies of contiguity. Less important for our
purposes, but significant for policy makers, is the finding that private single
provider systems are less costly than. public assuming there are limitations to the
monopolist’s power. Institutional structure and rules are shown to have
implications on price. Stevens identifies and, along with her previous study,
quantifies the pecuniary extemalities. However, any additional external effects
are ignored.

A more recent examination of solid waste collection in the UK. by Bello
and Szymanski compared average collection costs before and after the 1988
Local Government Act that forced competition into the provision of most public
services, including refuse collection. This act called for the mandatory bidding of
refuse collection to both public and private providers. Two findings are of note.
One, that infusion of competition through compulsory contract offerings lowered
costs an average of 22% from the year prior to the Act to the year after. This
suggests that some inefficiencies were eliminated as a result of competition. And
two, when the contract was awarded to the public provider as opposed to the
private contractor, the cost reduction was only 10%. This could be do to a lack of
competition in some local markets. Of the localities involved in the study, only

10% had bid out collection services. This means that entrepreneurs had little

24

experience with the refuse collection business and perhaps this precluded a truly
competitive process. The significance of this British study is that monopolies are
not a solution even though a one-provider system is obtained. Periodic contract
appraisal and requests for bids can provide the competitive incentive to operate
more efficiently.

In addition to those listed above, nearly a dozen studies focused solely on
the organizational distribution of solid waste collection. Useful for describing the
general trends in the choice of collection structure, lacking cost data and leaving
service levels variable, all are decidedly less useful to our purposes. (See Savas,
Chp. 4 for a summary of these studies)

In summary, the literature points toward the existence of scale economies
and the importance of exclusive routing arrangements for low cost provision. Yet
communities must not simply surrender market power in order to obtain a one-
provider collection system without the ability to restrain a public or private

monopolist.

25

Chapter 3

SOLID WASTE COLLECTION IN DELHI CHARTER TOWNSHIP

The Charter Township of Delhi, MI is home to approximately 21,000
residents. Roughly eighty percent of the population is classified as urban and the
remaining twenty percent as niral according to the 1990 census. The township
maintains 118 miles of roads within its 29 square mile community. Solid waste
collection is currently and always has been organized via the ‘free’ or competitive
market. The market structure has resulted in three private collection companies
simultaneously operating throughout the township. While each firm optimizes its
own collection routes by minimizing the number of miles needed to service their
customers, the overall structure fails to capture economies of contiguity and
economies of scale. The majority of residential streets have two or three times
the minimum refuse collection vehicle traffic necessary for collection.

The lgham County Solid Waste Management Plan is a collaborative effort
intended to meet the needs of county residents and promote wise resource use.
One of its goals is to devise ‘best management‘ practices for the county and all
local units of government to follow including the collection, transportation and
disposal of solid waste. This suggests duplicative private collection services that
create extemalities affecting prices, roads, and the environment is sure to be
divergent with county goals.

According to the lngham County Solid Waste Management Plan, Delhi

Charter Township will experience strong population growth over the next several

26

 

years. By 2008, the population is projected to increase by nearly 4,000
residents. Given the current development patterns of large subdivision with large
plot sizes, the problems of non-contiguous routing will likely be exacerbated due

to increased service demands and greater distances between units.

Objectives

When presented with the assignment of examining solid waste collection
in Delhi Charter Township, the first step was to determine the specific objectives.
Working with township officials, it was ascertained that two issues were of most
concern. It was assumed the current collection arrangement was more costly
than a single-provider system and that the added collection vehicle traffic
increases township road repair costs. Providing empirical research to guide
policy makers on these two points was the generalized objective. More
specifically, the research questions to be addressed were: (a) what is the
pecuniary impact of the multiple provider solid waste collection system on market
price; and (b) what is the cost of excess road damage resulting from the multiple
provider system. Only residential curbside refuse collection is included in the
analysis as multiple-unit dwelling, commercial and industrial collection impose
additional complications due to different collection techniques. However, the

analytic approach is valid for these types of collection as well.

27

Framework of Analysis

With clearly defined objectives, a framework of analysis was developed.
Both goals set forth require some measure of the differential impact of single and
multiple provider collection systems. Therefore, the cost of collection under the
current three firm structure is compared to a hypothetical one firm structure.
Under both structures, a collection vehicle spending identical time and using
identical labor and resources visits each customer. Workers perform the same
function at each stop and under both scenarios. Vehicle capacities are the
same so the aggregate number of trips to the disposal site are equal. In fact, the
only assumed difference between the three provider system and the one provider
system is the number of total miles driven. The reason for this is simple. One
centralized route planner would want vehicles to be efficient, that is, not pass by
any customers while on route and reduce backtracking miles. Imagine this
planner connecting the dots on a map of the township, connecting house to
house in the shortest possible manner. Routing design is often done manually
with the input of the driver, but there exists computer programs that build routes
automatically. However, the current structure in Delhi has three different planners
with three different maps (See Appendix F). Each map contains only the
individual firrn’s customer base. Assuming each is equally efficient at minimizing
individual route mileage, the ratio of the miles driven under the three provider and
single provider system is hypothesized to be greater than one and less than or

equal to three.

28

 

The imaginary single provider drives the minimum number of route miles
needed to collect solid waste at each home within the township. Excess route
mileage is defined as the current number of miles driven by the three firms minus
the minimum number of route miles. Once excess route mileage is obtained, a
value figure must be placed on each mile of excess. This figure must include
labor, resources and road damage estimates. The cost of excess mileage minus
the new costs incurred by the imaginary sole provider from its added market
share is assumed to represent the cost differential between the two structures.
This cost differential represents the added household expenditures on solid
waste collection resulting from the three firm system. Unrealized returns to scale

and contiguity are theorized as the sources of these added expenditures.

Methodology

The efforts to collaborate with the local firms proved fruitless. Each firm
was extremely protective of information they deemed proprietary, such as
number of customers and actual route structure. Ironically, this information is in
no way private, as simple observation could provide the research with identical
information. After experiencing this setback, it was decided three separate
samples representing high, medium and low density neighborhoods would
provide a sufficient data set. Each neighborhood was selected based on the
criteria of available, accurate GIS maps and apparent housing density. Using
both road and GIS maps as well as visual observation, high, medium and low

density sample were selected. Considering the costs of collecting relevant data

29

for the entire township and the lack of firm cooperation, the sampling
methodology was appropriate.

Data points were collected by observing the type of waste receptacle each
home in the sample set out to the curb and on which day. Each firm currently
collects on different days. These points were entered into a geographic
information system (GIS) map provided by the Tri-County Regional Economic
Development and Planning Agency. Twelve different maps were created with
this data, with each of the three sample neighborhoods having four maps
associated with it. One map represents the single provider system while each
firm required a separate map with only their customer base and route
information.

These maps were used to calculate the additional miles of collection
vehicle traffic from maintaining a three firm collection structure as opposed to a
one provider system. The marginal cost per excess mile is developed to find the
direct firm expenditures on this excess mileage. Then a scenario is proposed to
find the pecuniary costs associated with failing to capture economies of scale
and contiguity. This scenario shifts all customers to one firm to simulate a one-
provider structure. Under said scenario, the monetary impact can be interpreted
from the firm perspective as increased profit or the community perspective
through lower prices. Finally, the cost of road damage is estimated by combining
excess route mileage values with an US. Department of Transportation study on

pavement deterioration.

30

 

Chapter 4

DATA AND OUTCOMES

The sample data displayed in table 2 shows both the relative market share
for Firms X, Y, and Z and the size of the neighborhoods comprising the sample.
Extrapolating the sample market share to the entire amount of single unit
residential customers yields the estimated customer base for each firm in the
township as a whole.

Table 2: Market Share from Three Neighborhood Sample

 

 

 

 

 

 

 

 

 

Sample Neighborhood Firm X Firm Y Firm Z Total

Holt/Wilcox/Aurelius 255 137 31 423
Bishop/ Grovenburg/ Holt 76 15 7 98
Sandhill/ Dell/Pine Tree 153 17 22 192
Total Sample Market Share 484 169 60 713
Total Township Market Share 4684 1635 581 6900

 

 

 

Excess Route Mileage
The assumption of firm efficiency in route planning was difficult to maintain
because of the route measurement technique. The shortest route calculated
from the GIS maps might not produce the actual route driven due to certain traffic
laws, traffic patterns etc. In its place, the average of three routes through each
sample neighborhood was used. Repeating this process for each of the three
firms and the hypothesized single provider for each sample neighborhood yielded

weekly route miles driven. Table 3 should be interpreted in the following manner.

31

 

The row named ‘Three Firm Structure’ is the current combined number of miles
needed to collect solid waste per week. See Appendix A for specific
assumptions.

Table 3: Weekly Route Mileage in Sample Neighborhoods

 

 

 

 

 

 

 

 

 

Sargple Neighborhoods
6.332%.) ”3171 ggfgv Sagggmggw Tot...
olt

Three Firm Structure 6.95 20.98 13.38 41.31
Single Provider Stucture 4.48 10.17 8.37 23.02
Difference 2.47 10.81 5.01 18.29
Road Miles 3.74 9.29 11.30 24.33
Households 98 423 192 713
Density 26.20 45.53 16.99 29.31

 

 

 

 

 

 

 

‘Single Provider Structure’ is the minimum required mileage necessary for
collection. The excessive road traffic is found in the row entitled ‘Difference.’ The
actual length of streets involved in the sample as well as the number of
households in the sample is also provided.

It should be noted that the sample neighborhoods were by a purposive
sampling technique constrained by the availability of up—to-date GIS maps, time
necessary for observation and the desire to obtain different housing densities in
the sample. A few weeks of direct observation produced a sample size of over
10 percent of the single unit residences and over 20 percent of the total road
miles in Delhi Charter Township. Additionally, table 3 contains the density of the
three sample neighborhoods measured as houses per road mile. For example,

in traveling one mile in the Holt/ Wilcox/ Aurelius neighborhood, 45 single unit

32

 

homes will be encountered. From a firm perspective, this is the most profitable
neighborhood to be operating.

Having obtained the number of excess route miles for the sample, it is
necessary to translate these into the relevant township values. This is
accomplished by using the ratio of road miles in the sample (Table 3, 24.33
miles) to actual miles in the township, 118.28 miles. Sample data points were
then multiplied by this ratio. Table 4 displays the estimates of the miles
necessary to collect solid waste every week from the sample homes, from all
Delhi single unit homes, and every year under the single and multiple provider
structures. See Appendix A for specific information regarding these assumptions.

Table 4: Route Miles in Excess in Delhi Charter Township

 

 

 

 

 

Weelggtglzmple wefiggigf'” Yearly Delhi Totals
Three Provider Structure 41.31 200.83 10,443.06
Single Provider Structure 23.02 11 1.91 5,819.40
Difference 18.29 88.92 4,623.66
Total Road Miles 24.33 118.28 N/A

 

 

 

 

 

*Multiplying sample road miles by the ratio of actual road miles over sample road miles yields
estimated Delhi totals.

With Table 4, we have quantified the average yearly excess mileage from
non-exclusive routing. This figure is 4,623.7 miles, or difference between the

most efficient routing and the current three firm routing structure.

Marginal Cost Per Mile
The next step is to derive a marginal cost per mile to be multiplied by the

excess route mileage to provide us an estimate of the cost differential. As was

33

stated previously, excess route miles are those driven between collection points,
not inclusive of any time spent collecting and as such are seen as an
unproductive use of resources. The framework views the entire amount of
excess miles as a fixed component of the three firm structure. The concepts of
marginal and average costs are equivalent in this context because excess
mileage is unchanged. Marginal is the term used here since total cost is derived
from a breakdown of each cost component (Sugden and Williams, p. 33).
Marginal is also used to emphasize the fact that unproductive miles do have cost
associated with them. Including depreciation is controversial but justifiable as
marginal costs equal average costs for the remaining components labor,
maintenance and fuel. See Appendix B for a detail explanation of depreciation.

Table 5 displays the assumptions needed for a marginal cost per mile
estimate. See Appendix B for specific information on these assumptions. Left out
of the assumptions are overhead cost, which might include insurance and other
fringes as well as rental or electricity costs. Besides not having the financial data
on overhead, it should be excluded from marginal analysis because these costs
need not be incurred to drive the four thousand or so excess miles. These would
be included for an average cost per mile value, but these are fixed not variable
costs. Since they do not vary with firm output or excess route miles driven, they
must be excluded from marginal analysis.

Multiplying the marginal per mile cost of $1.54 (from Table 5) by the
excess route mileage from Table 4 yields $7,120/year, which is the combined

three firm total cost of overlapping, non-contiguous routes. This is a seemingly

34

 

insignificant amount, but it represents only the firrn’s direct expenditures on
excess route mileage. What remains unaccounted is the lost opportunity each
time a collection vehicle passes a household serviced by another firm. Each firm
must charge customers a higher per unit price when the customer base is
geographically dispersed. If each firm faced a geographically homogenous
population to service, there would be no unproductive miles. But if variety is
desired, routes are intermingled and excess route miles occur to satisfy demand.
The next section will provide an estimate of the magnitude of resources spent on
maintaining variety by way of increased prices.

Table 5: Cost Per Mile of Excess Route Mileage

 

 

 

 

 

 

 

Cost per Mile Comment
Fuel $ 0.18 Average of 5.5 mpg @ $1/gal
Maintenance 3 0.13 $5,000/year @ 150miles/day
Labor $ 0.90 $12/hr @ 13.3 mph in Delhi
Depreciation $ 0.33 $170,000, 12 yr. useful life, 10% salvage
Total $ 1.54

 

 

 

 

Pecuniary Extemalities of Non-Contiguous Routing
When communities permit more than one firm to operate in a non-
contiguous fashion, residents will be paying more for solid waste collection. The
basic approach is shifting the current three firm market to a single firm structure.
The market share of one firm is determined from the sample data, then revenue
and cost information is derived. Then the entire market share is shifted to that

one firm and again revenue and cost figures are determined. What does this

35

accomplish? First, revenue and cost data for a single provider collection system
is generated. Secondly, revenue and cost data can be compared before and
after this imaginary shift in market share, the difference is a good proxy for the
total pecuniary cost of non-exclusive service boundaries (assuming the cost
differential is returned to customers via competitive bidding). Quantifying this
additional cost of variety requires some specific information that if not available
must be supplied with suitable assumptions.

The distribution of the sample market share among the three private firms
was used to project the actual market share for the entire township and establish
a figure for the customer base for ‘Firm X’. Firm X has the largest actual market
share and was chosen at random to be the representative firm receiving this
hypothesized shift in market share. Calculating the added gross revenues from
the new market share is a simple task. It is the number of new customers
multiplied by $144, which is the average monthly cost mulitipled over the course
of one year.

Table 6: Firm X Gain From a Shift to the Single Provider Collection System

 

 

 

 

 

 

Gross Revenue
Firm X # of Customers ngftig) Monthly ($) Yearly ($)
New Share 6,900 12 82,800 993,600
Old Share 4,684 12 56,206 674,477
Gain from Shift 2,216 12 26,594 319,123

 

 

 

 

 

 

 

Table 6 present two scenarios for the township and Firm X. The single

provider system is seen in the row ‘New Share’ where the entire customer base

36

of 6,900 single unit households is serviced by Firm X. The assumed price of
twelve dollars is an approximate average of current prices charged in Delhi.
Actual prices range from nine dollars a month to over sixteen dollars (see
Appendix , depending on the quantity of trash that will be removed each week.
The most costly plan provides customers with a 106 gallon bin, while the least
costly service will collect only two bags of waste per week although it is restricted
to senior citizens. Other plans offer pre-paid bags, encouraging conservation.
This study assumes household production of solid waste to be 60 lbs. per week,
a figure commonly assumed in the field. (Cite lgham Co Study) Plans that would
accommodate this 60 lbs. requirement were priced at $11.75, $12.00 and $13.75
per month. Gross revenue increases by $319,123 under this twelve dollars per
month price assumption.

The change in costs resulting from the additional units being served is a
more complicated derivation. The details are best left for Appendix C, but a
summary of the major assumptions is found in Table 7.

Table 7: Added Costs to Firm X Under Single Provider Collection System

 

 

 

Cost Category Change Rational
Fuel (+) Increased route mileage consumes more fuel
Maintenance (+I Increased route mileage Increases maintenance

requirement

 

 

More customers increase the number of trip to the

Disposal M disposal site

 

Labor (+) More customers requires more labor hours to service

 

Excess route mileage declines, shortens the time
Labor (-) between stops, fewer labor hours required to service an
equivalent population

 

 

 

 

37

Fuel, maintenance and disposal costs are all variable costs that increase
as output increases. The cost of disposing waste at a landfill can only increase
because the volume of trash being transferred has increased. Fewer excess
miles are traveled as Firm X obtains more market share. But the reduction of
excess mileage is offset by the additional miles on route and to the landfill.
These offsetting miles can only be assumed to consume an amount of fuel
greater than the excess miles. This is because a vehicle traveling to the disposal
site is hauling its capacity, while the unproductive miles occur still on route. If a
truck is on route, it is not at capacity, otherwise no additional waste could be
carried. Simple physics reminds us the energy required to move a heavier object
(a full garbage truck) is greater than a lighter object (a truck that is not full). So,
the offsetting miles driven to the disposal site require more fuel at the margin.
Miles traveled on route are assumed to require a similar amount of fuel as the
excess miles traveled under the three provider structure. For ease of calculation,
this analysis will only account for the additional fuel consumed resulting from the
increased number of trips to the disposal site. This is a rough approximation, but
the miles driven to collect solid waste from the new customers is assumed to be
equivalent to the savings in excess miles driven by Firm X.

Labor has both a positive and negative component. First, more
households, 2,216 to be precise, must be served. This obviously requires more
labor hours. But there is also a reduction in work hours from the removal of
excess route mileage. As a single provider, Firm X does not pass by any

household with one vehicle only to have another a second vehicle service it.

38

Therefore the time between collecting waste at unit A and unit B decline as all
economies of contiguity are extracted. The underlying assumption is a savings
of five seconds between stops under a one provider structure (See Appendix D).
Calculated over the number of original customers provides a savings of nearly
350 hours per year in labor hours.

Table 8 displays the results of various formulas used to derive the added
cost of the over 2,000 new customers Firm X provides service after the
hypothesized shift in market shares. For the specific calculation, see Appendix C.

Table 8: Estimates of Cost Increase Accruing to Firm X Under Single
Provider Collection S stem

 

 

 

 

 

 

 

 

 

 

 

Cost Category Cost ($) - Detail

Fuel 1,341 7,375 miles at $1/gal and 5.5 mpg
Maintenance 959 $0.13/mile on average

Disposal 120,994 11,523 yds at $10.50/yd

Labor 15,360 1280 hours at $12/hr

Labor (4,056) 338 hours saved at $12/hr

Total Cost Increase 134,597

 

Having calculated the increases in gross revenues and total costs for Firm
X under a one provider system, estimating the cost differential with the current
structure is a simple matter of subtraction. The justification for this technique is
the following. One, the additional firm expenditUres on new collection customers
are more efficient than the previous expenditures of firms ‘Y’ and ‘2’ combined
because Firm X captures economies of contiguity (and scale to a lesser extent).
Whatever those previous expenditures on the 2,216 units were, they must

exceed the cost of a single provider. So, Firm X reaches alower point on the

39

average cost curve and can theoretically provide collection services to the
additional units at lower cost relative to the other finn’s ability. Two, if the price
remains at $12/month, total household expenditures on solid waste collection are
unchanged. Three, the difference between the additional revenue generated
(from Firm X’s perspective) and the cost of that additional service is firm profit.
This can be returned to customers via lower prices, distributed to labor through
increased wages or used to increase the owners return on investment. Finally,
lacking cooperation from the three firms and with no actual cost and route
information forthcoming, deriving revenue and cost in this manner was the next
best alternative. Table 9 displays the specific revenue and cost figures if this
profit is used to lower price, as is the theorized result with competitively bided
contracts and franchises arrangements.

Table 9: Unit Price and Estimated Profits Under a One Provider System

 

 

 

 

 

 

 

Firm X $12/month $11lmonth $10/month
Revenue increases 319,104 236,304 153,504
Cost increases 1 34' 597 134,597 134,597
Profit 184,507 101,707 18,907
Consumer Benefit na 82.800 165,600

 

 

 

 

At $12/month, consumers do not experience a price decrease, and
therefore the firm maintains all additional revenues as profit. If the price is
lowered to $11/month, all 6,900 single unit residential homes receive a saving of
$12 year. If the price collection service falls to $10/month, households receive

$24/year in the form of reduced prices. But in aggregate, total consumer benefit

40

 

can be as large as $165,600 every year. In the case of Delhi Charter Township,
this makes up nearly the entire 1997 road improvement and maintenance budget
of $178,490. The benefit looks even great if we consider the Township policy of
funding 75% of local access road improvements and maintenance with special
assessment dollars. These assessments come directly from the taxpayers that
benefit most from the repairs. In 1997, $98,000 was raised with special
assessments, while the remainder came from state, county and township
sources. Solid waste collection price reductions could substantially offset road
repair and improvement costs. These can only be obtained through a single
provider system, or exclusive routing areas. The latter of these will be more
costly unless the firm can somehow create contiguous routing in neighboring
communities. Three exclusive routing areas would not permit firms to fully
capture economies of scale, as the Delhi population is small and under 2,500

units per company would yield high average costs.

Road Deterioration
The ability of a road to withstand traffic loads depends critically on
construction techniques and usage. Holding fixed the quality of local roads and
streets in Delhi Township, as usage declines, the life span of the transportation
infrastructure increases. Yet when calculating the value of a road through some
measurement of usage, as in constnlction costs per mile traveled per year, the
cost of a road increases as traffic volume decrease. Think of an expensive bridge

built in a rural area. The bridge will last longer because it is sees traffic rarely, but

41

the cost per trip over the bridge is higher than it would be in a more populous
area.

Soto achieve the greatest value and lowest cost per use, roads should be
constructed well and the most destructive traffic should be discouraged. Herein
lies the problem with excessive route miles in solid waste collection. It causes
considerably more damage than normal automotive traffic and it is unnecessary.
The same weight and volume of trash can be collected, transported, and
disposed of with nearly half the mileage (See Table 4).

The road damage actually comes in two forms, pavement deterioration
and damage to the road ‘shoulder’. The deterioration of concrete or asphalt is
the gradual wear and stress placed upon a road from the dynamics of traffic load,
number of axles, climate, traffic density etc. Damage to the road shoulder occurs
when vehicles drive on the road edge where it meets a dirt or gravel substrate.
Unfortunately, there is no literature available on this particular type of road
damage. Attempting to quantify the damage caused solely by collection traffic is
hampered by an inability to distinguish between sources of the damage. While
garbage trucks do spend a majority of time on the road shoulder, so do mail
delivery vehicles as well as individuals homeowners entering and exiting their
driveway. An additional complication is having a combination of curbed and un-
curbed roadways. Only those roads with out curbs will sustain this second type
of damage.

It is possible to quantify damage done to pavement. An US. Department

of Transportation study (1997 USDOT Comprehensive TS&W) estimated the

42

deterioration of pavement resulting from various vehicle dynamics, such as

number of axles and gross vehicle weight. Because road construction quality is

the major determinant of damage from different vehicles, Table 10 shows the

proportion of roads by type for Delhi Charter Township. Primary roads are those

maintained by the lngham County Road Commission, while local major and local

access roads are the responsibility of the township.

Table 10: Cost of Pavement Deterioration from Excess Collection Vehicle

 

 

 

 

 

 

Traffic
Road Type Total Road Pavement Miles in Pavement Pavement

Miles by Damage Per Excess of Damage Per Damage Per
Type 1,000 Miles ($) Minimum in Year in Year in Delhi
Sample Sample ($) Township($)
Primary Roads 43.33 0.13 6.70 0.05 0.22
Local Major Roads 24.48 2.34 3.79 0.46 2.24
Local Access Roads 50.47 2.34 7.80 0.95 4.62
Total 1 18.28 18.29 1 .46 7.08

 

 

 

 

 

 

 

Table 10 presents the entire pavement deterioration costs as slightly
exceeding $7 per year. Considering the damage caused by a single unit, three
axle, 54,000 gross vehicle weight truck is only fraction of a penny per mile and
the sum total of excess mileage is around 4500, the amount seems more
plausible. This argument regarding increased road damage is fatally flawed until
some methodology can estimate the damage occurring on the shoulder of roads.
Attempting to decompose the township expenditures on road repairs into the
various deleterious effects would involve a tremendous effort at great cost. Even
then, as was presented in the previous section on pecuniary effects, budgetary

expenditures on road improvements in 1997 were less than $200,000. This

43

budgetary cost at least provides some upper bound on a possible cost allocation
of road damage to excess mileage, although the actual figure is expected to be

considerably less.

Summary of Results

Due to lack of cooperation from the three firms operating in Delhi Charter
Township, sampling techniques were implemented and particular assumptions
were forced upon the analysis. The general finding support what theory predicts,
that a single provider system will have lower costs than the three provider
system. We hypothetically shift all of the market to one firm, and examine how
this firm’s revenues and costs respond. The added customer base increases
firm revenue by $319,104 at a price of twelve dollars a month, while the cost of
delivering service rises by $134,597. This difference is a measure of the
pecuniary impact of variety. That is, the lack of consensus in firm selection
imposes a cost of $184,507 on the township. This represents a price that is
$2.15 higher per month that a single provider system. Future analysis might
seek out more cooperative firms. As economists, our analysis is only as strong
as the data we uncover. Public providers should be more open and could be
source of valuable insights into the industry.

The other objective of this study was to determine the cost of a three firm
structure in terms of road damage. Findings suggest that virtually no pavement
deterioration can be attributed to excessive collection vehicle traffic.

Unfortunately, the major theoretical component of road damage, shoulder

deterioration, could not be measured. Similarly, aesthetic damage is an
unquantifiable loss to residents. It’s relative value can be viewed as being either
less than the cost of collective action or less than the value of ‘free’ choice in the

solid waste collection market.

45

Chapter 5

PUBLIC POLICY ALTERNATIVES

Having explored the theoretical aspects of solid waste collection and
presented the findings of the empirical study in Delhi Charter Township, chapter
3 attempts to synthesis our understanding of theory and real-world observation
into applicable knowledge. It is hoped policy makers will find this chapter a way
of framing their individual community’s solid waste collection issues, and not
prescriptive advice. Let it be known in advance, the institutional framework laid

forth is the work of A. Allan Schmid and not of the author.

Institutional Framework

The bacis process of institutional analysis will be described, but the focus is to
illuminate the distributional and substantive consequences of a given institution.
Institutions are the laws, rules, habits, traditions, mores, etc. that govern our
social and economic/political lives (Samuels, 1989). Specifically, institutional
impact analysis will be employed which holds fixed the good under analysis and
the ways in which rules are made. For example, impact analysis ignores voting
rules that could affect the outcome of an election. Rather, it examines the
cOnsequences of alternative ’mechanisms’ that will produce governmental
leaders.

The institutional paradigm has four elements: (a) the good; (b) the

situation; (0) the structure; and (d) the performance. This analytic tool with be

46

refered to as the Situation-Structure-Perfonnance paradigm, or SSP paradigm.
The good is the object under examination. Here, the goods are solid waste
collection, roads and aesthetics. Situation refers to the inherent physical
properties that the goods exhibit. With solid waste collection, the inescapable
fact is that scale and contiguity economies exist. How communities choose to
handle goods with these characteristics will have distributional and pecuniary
impacts. Structure is the set of rights granted to individuals. It is a policy choice
to be made, as in deciding between a competitive market solid waste collection
system and a franchise arrangement. Performance is the predicted outcome of
a given set of property rights for a good or service that has specified properties.
One such performance prediction could be that under a market structure, goods
exhibiting economies of scale would be priced higher than the lowest point on
their cost curve unless collective action bring about unanimity.

Three more considerations must be mentioned. First, a model of
behavior is needed to link structure with performance. For instance, what are the
dynamics of group behavior that may facilitate or present obstacle to collective
action. Second, transactions are the basic unit of analysis. Individuals engage in
economic transactions that are structured by behavior, rules, laws, etc. that have
aggregate impacts. Third, constancy must be maintained in measuring
performance. If the direct cost of solid waste collection is the object of concern,
then some attempts must be made at quantifying these costs as the structural

variable is altered. The remainder of this chapter will proceed with an

47

institutional analysis under three policy alternatives: Market, Hierarchy, and

Administrative Rule.

Situation

Situation, as defined by Schmid, refers to the inherent physical
characteristics of goods or services that create human interdependence. The
inescapable feature of solid waste collection is that of economies of contiguity
and scale. It is useful to note the distinction between economies of scale and
economies of contiguity. The former refers to a declining average cost as the
customer base increases (several other sources are described in chapter 1),
while the former points to the diseconomies of non-exclusive service boundaries
which result in two or three firms operating similar routes.

Roads are considered an incompatible use good (IUG), suggesting the
inability to provide (or at least extreme cost of providing) differing levels of
quality. Additionally, roads are a high exclusion cost good (HEC) due to the
prohibitive costs of denying use of the roads to any particular user. The aesthetic
environment of a community has the same inherent characteristics as roads. One
level of environment precludes any other and prevention anyone from enjoying
the benefits of a given aesthetic quality is nearly impossible.

The SSP paradigm is useful in identifying conflicting parties. Because
economies of scale, economies of contiguity, IUG and HEC are presented as the
relevant variables, theory will lead to us the source of interdependence and
conflict. Economies of scale in solid waste collection produce a tradeoff between

low average cost and variety in service delivery. Residents desiring low cost

48

service are pitted against those who would opt for choice in the selection of a
solid waste collection firm or differing quality levels. Incompatible use implies
only one quality of the good is available or only one use of the good in question is
viable at any given time. Road quality and a pleasing aesthetics are thus
incompatible use goods. If someone deviates from the collective choice of
aesthetics or road quality, all members are forced to accept the altered level of
road and aesthetic quality. Similarly, roads and aesthetic quality are both high
exclusion cost goods. The free-rider problem (and associated unwilling-rider
problem) is present because an individual who deviates from community
preferences enjoys all benefits from defection but shares the costs of defection
with the entire community, therefore only paying for a fraction of the costs
imposed. A one provider system that coerces cooperation (prevents defection
from community preferred option) produces unwilling-riders.

The breadth of conflict and interdependence is summarized. Increasing
returns to contiguity and scale create a tradeoff between low-cost service
demanders and those desiring variety and choice. lUGs force a declaration of
property rights because the resource may only be used in one manner. Thus if
the problem is to be settled, one party must be granted ownership or use rights.
A conflict between free-riders and unwilling-riders emerges when the community
desires a HEC be produced and tastes differ, such as roads and the aesthetic
quality. Left for further research are the conflicts among solid waste collection
firms resulting from returns to scale and the conflicts between neighboring

jurisdictions over the costs imposed by collection vehicle traffic and pollution that

49

crosses political boundaries. A related issue is the input of county, state and
federal jurisdictions when intergovernmental transfers are used to finance local

road repairs and improvements.

Structure and Performance

The institutional impact of public (governmental) provision, competitive
market provision, and regulated market provision will be analyzed. Following the
SSP paradigm directly, structure is defined as the designation of rights (a policy
choice to be made) and performance is meant to predict distributional and
substantive consequences of a given institution. An underlying behavioral model
links structure to performance via institutional knowledge of the complexities of
humans and human interaction. Bounded rationality‘ and difficulty in mobilizing
large groups for collective actions are the foundation upon which the behavioral
model rests. Further elaboration will be added where needed as the alternative

structures are specified.

Public Provision
Governments provide all types of services. Over the past few decades,
there has been a push to ‘shrink the size of govemment’ and privatize many
traditionally publicly produced services. It makes little economic sense for

townships to produce solid waste collection publicly due to their low population

 

‘ When information is costly to obtain and cognitive processing is limited, it is irrational to seek full
information when making decisions. (Frank, pg. 247)

50

densities. There would simply be too few customers to justify the large capital
investment collection requires. This is often called the make or buy decision
(Kelly, pg 97) This requires specific information on the cost to self-produce, the
cost to contract out as well as monitoring costs if the community is to make an
educated choice.

However, higher density cities can benefit from a single provider or
geographic segmentation of the market (Stevens, 1978). Self-provision is one
means by which this can occur. The institutional questions that must be
addressed are who determines the level of service (frequency of pick-up, type of
trash collected, etc.) and how is the public collection financed. If general tax
dollars fund the service, calculating the amount of the sen/ice to demand based
on cost is impossible for individuals. This would most likely lead to an
undervaluing of the price and overuse of the service. Monthly billing would
simplify the cost information for customers, but no incentive to economize on the
production of household use is present. Unit-based pricing allows citizens to
adjust household production of solid waste according to the cost charged per
weight/volume unit. Note that this could be accomplished simply with a per bag
fee, or more sophisticated means such as weighing the trash with an onboard
scale. The cost of these methods will clearly vary.

Providing solid waste collection publicly can introduce adverse incentives

in the delivery of service. Public managers, facing no competitors, may allow

 

5 Olson posits large groups are prevented from further their own interest because 1)only a small fraction of
benefits accrue to individual members, 2) only a small fraction of benefits accrue to any subset of group
and 3)transactions costs are a function of group size. (summarized pg. 48)

51

costs to increase and quality to deteriorate. Unionized labor can also exert
influence over wage rates causing costs to rise. Proper incentive contracts for
mangers, or bidding out to private collectors a few geographic segments of a
community will act to curb some inefficiency thought to be present in the public
sector (Bello and Szymanski, 1996).

Public provision, an act of coercion, provides lower unit cost by capturing
economies of scale, minimizes road damage with efficient routing and maximizes
aesthetic value by reducing the number of collection day per neighborhood.
Those preferring variety experience a loss in utility under public provision. Thus,
this segment of the community will not choose this provision option. For policy
makers who seek the public provision alternative, it becomes a choice of
compensating the variety lovers for their loss of utility or realigning their
preferences to better fit with the rest of the community. Compensation is not
viable because individuals would misstate their losses and we have no way of
measuring such a loss even if people were honest.

There, policy makers are left to change their constituent's minds. To alter
preferences of variety lovers, Schmid (1999) and Margolis (1987) suggest
providing patterns and cues to allow the brain to fit the current situation with past
situations. A salient example of the resource waste associated with multiple
providers of a good with economies of scale, like municipal water, telephone, or
cable television service, could cause the mind to jump (Margolis, p. 39) to an
appropriate conclusion without full information regarding the issue’s complexity.

For a policy maker faced with questions regarding the public provision of solid

52

waste collection or pressure from those wary of government could point to the
municipal water or sewer system as an analogy without having to explain issues

of declining marginal costs or returns to contiguity.

Competitive Market Provision

By competitive market provision the author refers to the collection of solid
waste via multiple “unregulated” firms. Collection is unregulated in the sense. that
price and location of operation are left to market forces, but even the market has
rules. All drivers have to be licensed and vehicles must meet not exceed load
restrictions, for example. But more to the point, market rules establish a set of
opportunities under which firms, consumers and governments operate. If
neighbors were allowed to sue one another and recover damages for the higher
prices incurred under the multiple provider collection system, the likely result is a
one provider system. However, market rules do not set forth these property
rights. Those preferring low unit cost collection have no legal standing from
which to collect compensation from those preferring variety and choice.

Therefore, economies of scale and contiguity are not fully exploited and
low cost service, high quality roads and aesthetic quality are underproduced.
There are two ways to extricate a community from this outcome and still maintain
a largely unregulated market. One, a firm can attempt to alter preferences. A
firm might try to engage in differential pricing or change preferences to lure
customers from the competition and build customer base along their existing

collection routes. However, given that all firms would follow these or similar

53

tactics, the gain for those preferring low cost service is likely to be zero. And
differential pricing is currently an unavailable firm strategy under any foreseeable
rights structure. Altering service levels is another way to change consumer
behavior. For example, a firm might offer recycling at a reduced rate to current
refuse collection customers. This would induce those wishing to recycle to
switch from a competitor. Yard waste and bulk item pickup offer similar
opportunities for firms to segment the collection market. Yet, unless community
preferences are similar, multiple providers will most likely prevail.

The second option to capture contiguity and scale economies under a
competitive market system is collective action. Community based or government
led educational campaigns could act to increase demand for one firm and induce
cost savings to that one firm and cause average cost to rise in the others. As
Schmid (1987) suggests, this will act to select one firm with this circular and
cumulative effect thereby producing the desired outcome. Buchanan and Tullock
(1965) observed that mutual gains from trade exist when a group is faced with
extemalities (like aesthetic deterioration from inefficient solid waste collection)
and the cost of working together voluntarily are sufficiently low. What must’ be
present for collective action to be successful in providing the incompatible use
and high exclusion cost goods low-cost service, quality roads and quality
aesthetics? Group identity is an important factor in building cooperation within a
community (Dawes, p. 109). Communities with a point of convergence, such as
religion or even high school athletics could provide individuals with a sense of the

“good of the whole'. Olson identifies group size and transaction costs as the

limiting factors in collective or cooperative behavior. The evidence points to the
difficulty in generating consensus and unanimity in large, heterogeneous groups.
Friction is wonderful imagery for the transaction costs of organizations.
Williamson (1989) posits these frictions to be value neutral, but one must
acknowledge the role of transactions costs in protecting the rights of some while
discouraging movements from the status quo. With Delhi Charter Township,
those who favor the current three firm market structure are protected by the
‘friction’ obstacle.

Increasing returns to scale provides a ‘positive feedback mechanism’
(Arthur) through which managers see improved firm profitability as output
expands. This drive for output by managers is sometimes at the expense of
contiguous routing and economies of scale and inefficiency results. Firm
behavior combines with individual choice to produce a ‘social trap”, as described
by Platt (1973). As additional firms enter a one-firm solid waste collection
market, each new firm gains customers and behavior is reinforced. Citizens may
be offered similar prices and select, as part of a generalized standard operating
procedure, a firm of their personal choice. To cope with our increasingly
complex consumption decisions, relevant information is often excluded from our
decision making process. Thus, social costs are ignored for simplicity as often
as they are for information deficiency. Simultaneously, road damage increases
and aesthetic value declines. Individuals deciding from whom to buy services

have little impact on the ‘common interest’ and little way of knowing which firm

55

contributes the most to the ‘common interest’. Thus, competitive markets fail to
produce what is most desirable for some members of the community.

One competitive option does exist, but would most likely fail anti-trust
tests. If firms coordinated market areas or developed standardized business
practices about locating operations, the low unit cost could be reached. This is
unforeseeable due to the entrenched notions of competition held by firm

managers.

Regulated Market Provision

Under a regulated market structure, firms bid on geographically defined
market segments. To ensure communities capture economies of contiguity and
scale, the appropriate size must be established given the level of technology
available, population density and geographical peculiarities. In large cites,
geographic segmentation is required, while such segmentation seems inefficient
in a township the size of Delhi, for reasons stated earlier. Two main alternatives
exist for communities.

Competitive Contracts

First, a strict competitive contract could be negotiated. Here, the
community defines the level of service and collects payments to distribute to the
firm. Rules defining who chooses level of service and method of payment must
be clearly established prior to contract issuance. The interests of low cost,
standard quality users are served at the expense of unwilling riders. However,
monitoring and enforcing contracts is costly because bounded rationality and

information costs produce incomplete contracts. Thus, the true preferences of

56

either party are not known during negations and planning for all contingencies is

impossible. Cross subsidization among citizenry will occur if financed with

general tax dollars in the sense that people utilize the service in differing levels

but pay similar amounts. This is not the case if property tax mileage is used and

we assumed household waste production is linked with housing values.
Franchise Arrangements

The second option of regulation is franchise arrangements. Franchises
are exclusive rights to operate free from competition. Individual consumers
negotiate level of service and price, which reduces the prevalence of unwilling-
riders when compared with strict contracting. This administrative structure offers
the highest level of service choice to residents while still capturing economies of
contiguity and scale.

Before implementing a contract or franchise arrangement, policy makers
should consider the availability of bids in the future. The question of asset
specificity needs to be addressed. Williamson (1985) points out that future
arrangements may not achieve initial levels of performance due to lack of
competition if transaction specific assets are significant in the winning bid. For
example, if a bid requests large investments in modern, expensive solid waste
collection equipment, the winning contraCtor has advantages over the
competition in future bids. However, the relative bargaining power is related to
the communities willingness to accept different collection vehicles and the firms
next best use for the vehicles. If the firm faces significantly lower returns to the

assets in question, the community has a higher relative bargaining position.

57

Thus, competition may not prove that crucial if the firm has specific assets.
However, this is unlikely given the nature of collection vehicles. Also unlikely is
the lack of forthcoming bids in future contracts given the rise of large national
collection firms.

Other administrative rules falling in this category are rules concerning
hours/days of operation by location, licensing and vehicle weight laws enforced
by the county or state weighmaster. These can combine to reduce the effects of
multiple-firm markets, by lessening the aesthetic deterioration and better reflect
the cost-variety tradeoff inherent in goods with increasing returns.

Regulated market provision, as well as public provision, create unwilling
riders. Presumably the objection to regulation moves beyond variety for variety’s
sake to some qualitative service differences. Adapting Hirshman’s (1970)
concepts of exit and voice, unwilling riders do have the voice option available at
both firm and governance level. Complaining or suggesting change directly to the
firm could produce more optimal outcomes. Voting or legislative meetings
provide citizens an opportunity to express their opinions. Exit is available to the
community as a whole if collection performance is unsatisfactory, however voice
is clearly the preferred option for the firm. The contract (or franchise) monitoring
duties are an added cost, but can provide the firm with valuable information to
maintaining the contractual (or franchise) arrangement. While voice does
provide an option for unwilling riders, their lowest cost option, simple exit, is not
available. This might suggest to policy makers to consider the viability of self-

haulers, and specifically in more rural areas the possibility of illegal dumping.

58

Market Segmentation

If Delhi chose to divide its market into two or three sections and offer
franchises or bided contracts, economies of contiguity would be reached and
collection costs would decline. The amount of scale economies that would be
extracted under such an arrangement would be minimal, and therefore costs
would be higher than under a single provider system. Additionally, policy makers
are faced with what would likely be different prices for different residents based
on where they live. Perhaps offsetting this concern is the fact that monopolistic

power can not be exploited.

Rules for Making Rules

This section is meant to highlight some of the positions where policy
choice can impact the system of governance. Change analysis predicts the
outcomes of rules for making rules. Stated differently, the various methods of
decision making impact outcomes and performance as much as the choices
available in the decision making process. An example might prove helpful.
Several decades ago, South Carolina’s legislature voted to wave a Confederate
army battle flag atop its state capital building. Some find this offensive and a
reminder of the South’s racist and segregationist past, others a source of state
pride. Supporters of the flag state point to the vote of years past by
democratically elected officials as proof of the validity of its current status. But did

the democratic process, as it existed before the civil rights movement, fairly

59

represent the opinions of all South Carolinians? Did African Americans have the
right to vote without discriminatory poll taxes? Were political boundaries drawn
to prevent majority democratic or African American districts? This hopefully
illustrates that the manner in which policy decisions are made is equally, if not
more important than the policy options from which to choose.

If townships are prevented from regulating the solid waste collection
industry operating in their jurisdiction, market provision will prevail. Townships
populations are generally too small and too widely dispersed to realize
economies of scale. Intergovernmental contracts may utilize some excess
capacity, but customer density would likely decease not increase and may offset
economies of scale with increase transportation costs.

At the local level, assuming townships may enact regulation, voting rules
could affect the solid waste collection structure chosen. At-Iarge elections of
township board members, as compared with ward or precinct elections,
increases group size and heterogeneity, reduce group identity and increase
transaction costs. This will most likely result in market provision because
collective action is more difficult and each board member is directly responsible
to all citizens. Institutional analysis predicts ward elections will led to a single
provider system because board members from high-density areas can be an
effective issue advocate for the provision of the efficient solid waste collection.
This assumes high-density areas are more acutely aware of the cost-variety

tradeoff and are more homogeneous in preferences.

60

Future Research

Future analysis should be focused on refining the relationship between
cost of service provision and density of service area. This was the essential
issue under consideration in Delhi Charter Township. Three firms operating in
the same service area decreases the density of collection units for all firms and
increases the cost for all customers. Lack of access to firm information
prevented establishing the cost structure associated with current density levels.
Possible sources of similar information may be found in communities that are
moving from a multiple provider to a single provider structure. A more intensive
analysis might gather a panel data set of communities of differing service
densities with single provider collection. This approach could shed light on the
cost-density relationship. Further, it is necessary to obtain accurate, up to date
GIS maps and detailed information on firm costs. Routing estimates are
constrained by the tool used to measure them. And without firm cooperation with
regard to financial and customer base data, economists are left to surmise and
assume information making conclusive findings only as strong as those
underlying assumptions.

Additionally, while not a component of this study, the location of disposal
site can significantly alter the cost of collection. Examining the competitiveness
of the disposal market could be a useful addition to collection analysis. If the
local landfill can prevent use by one or more firms, a barrier to entry in the local ,
collection market will exist relative to the location of the next closest disposal

opfion.

61

Finally, researchers could ascertain the relative values placed on pleasing
aesthetics and high road quality. This analysis assumes Delhi Charter Township
to value these two goods. However, it is an empirical question whether a
community in fact values these goods and is prevented from reaching them due
to collective action problems or simply prefers having the choice of collection
firm. Here it is left to township leaders to make this determination, but
.. researchers could survey community opinion, or use road expenditures or blight

laws and zoning rules to proxy the relative value of road quality or aesthetics.

Concluding Comments

The two outstanding features of efficient solid waste collection are: (1)
economies of scale and contiguity; and (2) the requirement of unanimity. Policy
makers must first begin with this basic understanding before manipulating the
institutional structures to bring about the desired performance objectives. The
fundamental fact of human interdependence helps focus institutional analysis on
the physical characteristics of the good, the policy decision variables and
behavioral norms that give this analysis predictive power. With solid waste
collection, the interdependence comes in many forms. The individual selection of
collection firm creates pecuniary extemalities, found to be $2.15 per household
per month in Delhi Charter Township. Damage to aesthetic quality and road
deterioration results when individual choices do produce consensus. Additional
interdependencies arise when collective action and cooperation are sought.

Tastes and preferences should, in the end, inform policy makers on the proper

62

community solid waste collection sthcture given the variety and cost tradeoff can
be fully understoOd. This analysis attempts to provide a better understanding of

this tradeoff.

63

APPENDICES

64

 

 

APPENDIX A

SAMPLE DATA

Table A-1: Sample Neighborhood 1

 

Measurements (miles)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bishop/ Grovenburg/ Holt 1 2 Average
Firm X 3.82 3.49 3.77 3.69
Firm Y 1.17 1.26 1.38 1.27
Firm 2 1.67 2.50 1.80 1.99
Combined Route Miles 6.95
Shortest Route Miles 4.03 4.63 4.78 4.48
Excess Route Miles 2.47
Total Road Miles 3.74
TABLE A-2: SAMPLE NEIGHBORHOOD 2

Measurements (miles)

Holt/ Wilcox! Aurelius 1 2 Average

Firm X 9.23 8.67 8.38 8.76
Firm Y 4.91 4.55 4.82 4.76
Firm 2 7.45 7.24 7.70 7.46
Combined Route Miles 20.98
Shortest Route Miles 10.39 9.95 10.18 10.17
Excess Route Miles 10.81
Total Road Miles 9.29
TABLE A-3: SAMPLE NEIGHBORHOOD 3

Measurements (miles)

Sandhill/ Dell/Pine Tree 1 2 Average
Firm X 7.51 7.40 7.25 7.39
Firm Y 3.54 4.10 3.56 3.73
Firm 2 2.18 2.39 2.23 2.27
Combined Route Miles 13.39
Shortest Route Miles 8.41 8.51 8.20 8.37
Excess Route Miles 5.01
Total Road Miles 11.30

 

 

 

 

 

65

 

 

 

 

ASSUMPTIONS USED TO DERIVE EXCESS ROUTE MILEAGE

The calculation of excess route miles is critical to this study. A

straightfonlvard formula was used. The ratio of sample miles to actual road miles

(118.28/24.33) is the factor by which we multiply excess sample miles to yield

total excess miles in the township. The underlying assumption is that the sample

accurately represents the true routing structure throughout the township. That is,

the same proportions of route miles and excess miles exist in both the three

sample locations and the remaining township.

Table A-4: Route Miles in Excess in Delhi Charter Township

 

 

 

 

 

 

 

 

Weeklly Sample Weekly Delhi Totals Yearly Delhi Totals
otals

Three Provider Structure 41 .31 200.83 10,443.06
Single Provider Structure 23.02 111.91 5,819.40
Difference 18.29 88.92 4,623.66
Total Road Miles 24.33 118.28 NIA

 

118.28/24.33 = 4.86 x 41.31 = 200.83 x 52 = 10,443.06

66

 

APPENDIX B

OBTAINING MARGINAL COST PER MILE OF EXCESS COLLECTION

These calculations require a number of assumptions. Kahn Manufacturing
supplied estimates of fuel consumption per mile, ranging between 4 and 7 mpg.
The average 5.5 mpg was included to better balance average consumption to
account for the low speeds driven while collecting. Consumption tends to be less

efficient as speeds decline.

TABLE B-1: FUEL USAGE ASSUMPTIONS

 

 

 

 

 

 

Per Mile Costs Cost Per Unit Fuel Milage‘ Per Mile Costs
($) (miles/gallon) ($)
Fuel 1.00 4.0 0.250
1.00 5.5 0.182
1.00 7.0 0.143
Average Consumption 1.00 0.192

 

 

 

 

 

Maintenance expenditures per mile are based on interview data from the
three firms. Mileage per year is the result of the following formula: Trucks
average 18.75 mph over an 8-hour day, 6.25 hours with time spent off-route
driving to the disposal site, time waiting at the disposal site and lunch. This
yields 150 miles/day. Times 5 days/week and then times 52 weeks yields 39,000
miles/year. The 18.75 mph assumption is based on 1 [4 day spent off-route at

35 mph. The remaining on-route time is spent traveling 13.3 mph.

TABLE B-2: MAINTENANCE ASSUMPTIONS

 

Yearly Miles/year Maintenance/mile

 

 

 

 

 

 

Maintenance $5,000 39,000 $0.1 3

 

67

Labor costs per mile are a function of time, speed at wages. Through
interviews with the firms, a wage rate of $12/hr seems reasonable. Crew size
was variable between the firms and within the firms depending on vehicle type.
These are labor costs for only those miles traveled within Delhi, were all excess

route miles are traveled. (12/13.3 = .90)

TABLE B-3: LABOR ASSUMPTIONS

 

Wage ($lhr) Crew size Miles/hour Cost/mile

 

 

 

 

 

 

 

Labor 12 1 13.3 $0.90

 

Data used to calculate depreciation were obtained through interviews with
firm representatives. That depreciation is included in a marginal cost per mile
figure should come as a surprise to all economists. Normally, cost-benefit and
project analyses are only interested in marginal costs. This is because decisions
are often incremental and marginal costs reflect the opportunity cost associated
with incremental actions. (See Sugden and Williams, p.31-36) Depreciation is an
arbitrary average cost value that is excluded from usual cost-benefit analysis. It
is included here because the hypothesized decision is between a one-provider
and three-provider collection structure, which is in the broad sense an
incremental choice.

We have found the difference between these two policy choices to be
4,623.66 unproductive collection vehicle miles. What we are concerned with is
the total cost of these excess miles. To obtain this cost difference we
decompose it into labor, maintenance, fuel and some portion of the physical

capital used. Labor, maintenance and fuel are assumed to have constant

68

marginal costs, which are mathematically equivalent to their average cost.
Constant marginal cost is a reasonable assumption because excess miles are
identical, unproductive miles driven at a constant rate of speed. Some portion of
the physical capital must be included because excess miles are not possible with
vehicles. The portion chosen as appropriate is a simple straight line depreciation
value. This average depreciation value, as well as labor, maintenance and fuel
are unchanging because the choice of three firm structure dictates 4,623.66
miles must be driven.

More succinctly, choosing the three firm collection system is equivalent to
choosing a one provider structure plus one truck driving 4,623.66 excess miles.
Buying this amount of vehicle-miles requires labor, maintenance and fuel
expenditures as well as a truck. Seen in this manner, there is no marginal
decision per se. And the equivalence of average and marginal costs for labor,
maintenance and fuel permits the inclusion of depreciation in the marginal per

mile costs.

TABLE B-4: DEPRECIATION ASSUMPTIONS

 

 

 

 

 

 

 

 

 

Depreciation

Price of New Vehicle $170,000
Lifespan (yrs) 12
Salvage Value 10% $17,000
Price-Salvage] Expected Life $12,750
Depreciation/Mile $0.33

 

$12,750 = ($170,000 - $17,000)/12 years
$0.33 = $12,750/39,000 miles/year

69

APPENDIX C

COSTS AND BENEFITS OF SHIFT TO ONE PROVIDER SYSTEM

This is the most important set of assumptions to the validity of this study.
Firm X is hypothesized to gain the entire market share of its two competitors.
The revenue, at a price of $12/month, remains constant before and after the shift
of market share. What is assumed to be different before and after the shift is the
cost of service provision for the 2,216 new clients of Firm X. Lack of cooperation
with this study from the three firms prevents calculation of cost under the three
provider system. This is because the 2,216 units do not represent marginal units
for Firms Y and Z. They represent the entire Delhi market of both firms. These
units are marginal units, i.e. adding only variable costs and not requiring added
capacity for Firm X. This may not be entirely accurate, but comparing Firm X’s
route mileage to the shortest route mileage shows only relatively small increases
in route sizes will satisfy the townships routing needs. The ratio of Firm X route
mileage to minimum required mileage is .82, .86, and .88 for sample
neighborhoods 1, 2, and 3 respectively. The follow is the formula used to derive
the costs of the 2,216 marginal units to Firm X:
C=K+D+F+M+Li-Ld
Where C = Cost of new collection units

K = New capital requirements

D = Added disposal costs at landfill

F = Added fuel expenditures

M = Added maintenance expenditures

Li = Increased labor required
Ld = Decreased labor required on previous collection units

70

 

APPENDIX D

GAINS FROM ECONOMIES OF CONTIGUITY

Shifting to a one provider collection system is assumed to reduce the time
between pickup points since all households are serviced by the same provider.
No units are passed by and there are no excess route miles. Table D displays
1 the assumptions used by the analysis. The five seconds saved (.75 minutes
versus .67 minutes) will allow for the collection of 63 additional units per eight

hour shift. The 480 minute shift is reduced to 375 minutes of collection time due

to lunch breaks and off-route time traveling to the disposal site.

Table D: Savings from One-Firm Structure

 

Three Firm Structure

One Firm Structure

 

 

 

 

 

 

 

Vehicle capacity (lbs) 30,000 30,000
Average lbs/stop 60 60
Collection minutes 375 375
Minutes/unit 0.75 0.67
# Units/day 500 563

 

71

 

APPENDIX E

LEVELS OF SERVICE IN DELHI CHARTER TOWNSHIP

Table E displays the current price structure and service options available
to residents in Delhi Charter Township for solid waste collection. Service levels
are measured weekly, except for yard waste, which is seasonal. Firm X has a
one time fee of $85.00 for seasonal yard waste collection.

Table E: Price and Service Options

Monthly cost

Service Level Firm Y

60 bin + 1
bin + 3
bin

104 bin

65 bin

95 bin + 3

6

ard waste

*One time seasonal fee

 

72

APPENDIX F

EXAMPLE OF GIS MAP:

SAMPLE DATA FROM HOLT RD/AURELIUS RD/ WILCOX RD.

 

 

 

 

 

Holt Rd

77 ‘ f

 

 

 

 

 

 

.ul “nu
Il.'i
I
I
. no
I

 

 

 

 

 

 

 

 

 

Aurelius Rd

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

73

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74

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