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When Does Interstate Transportation of Municipal Solid Waste Make Sense and When Does It Not?

This article examines the conditions under which some form of restriction on the interstate transport of municipal solid waste is desirable from both an economic and policy perspective. The objective is to provide insight for policy and motivate further consideration of this important issue. The courts have played an important role in influencing policy in this area. Several court decisions have had an impact on the solid waste management strategies of state and local governments. The primary impact has been to define a set of circumscribed possibilities in which state and local governments may restrict interstate disposal of solid waste. This article examines when there is synthesis between the legal framework for interstate disposal restrictions and economic efficiency from a state and local management planning standpoint.

Interstate disposal of municipal solid waste has been playing an increasingly important role in meeting the demand for disposal capacity. In general, the courts have supported a national market in municipal solid waste disposal by declaring unconstitutional legislative or regulatory approaches that inhibit interstate disposal. Courts have long recognized the benefits of maintaining free and open markets and have often invoked the dormant commerce clause to prohibit attempted restrictions on interstate commerce. This legal rule is used to prevent state and local laws or regulations from inhibiting trade unless they are shown to be nondiscriminatory and to promote a legitimate local interest with only incidental burdens on interstate commerce. Several courts, especially the Supreme Court, have invoked the dormant commerce clause when striking down laws and regulations prohibiting the interstate movement of municipal solid waste. These decisions find support in basic economic theory, which explains that in the absence of a market failure, waste disposal can be most efficiently and cost effectively provided through the operation of a free and unrestricted market.

Nevertheless, some state and local governments have intervened with policies that inhibit the operation of a competitive market in municipal solid waste disposal. These policies can be divided into two categories. The first restricts imports on shipments of municipal solid waste. The second, known as flow control, restricts exports. Waste management jurisdictions require that all waste collected from within their borders be disposed of at designated facilities.

Justifications for such restrictions have included the desire to assure that waste is properly disposed of, that the burden of this activity rests with those who generate it, and that adequate disposal capacity is developed and continually financed.(1) Brownlee (1992), Petersen and Abramowitz (1995), and O'Leary (1997), as well as many others, suggest that such government intervention is necessary to ensure environmentally sound waste disposal as well as proper planning for future disposal capacity.

Further, from an environmental quality perspective, Dumars (1990) asserts that there is no economic theory that justifies exporting municipal solid waste.

Our examination of both the regulatory and economic influences on the waste disposal market does not substantiate the justifications presented above for restricting interstate waste disposal. While states or local governments may enforce even stricter requirements, federal regulations designed to protect public health and the environment must be enforced regardless of restrictions on interstate disposal. For example, the U.S. Environmental Protection Agency (1995) indicates that flow control legislation does not play a significant role in protecting human health and the quality of the environment. Similar reasoning suggests that federal regulations negate support for import restrictions whose stated purpose is to protect health and the environment.(2)

Further, development of sufficient waste disposal capacity does not appear related to restrictions on interstate waste transport. For instance, Repa (1997) states that there is more landfill capacity in the United States than there has been for the past 10 years. According to Repa (1997) and Repa and Blakely (1996), 38 states were listed as having over 10 years of existing landfill capacity in 1995 as compared to only 21 states in 1992. Further, 15 states increased their available disposal capacity from between five and 10 years to more than 10 years. Both Repa and Blakely (1996) and the U.S. EPA (1995) credit private investment rather than government intervention for increasing waste disposal capacity.

However, a judicial distinction between government regulation and government as an active market participant (market participation) has developed under which states and local governments may, under a narrow set of circumstances, restrict interstate disposal of municipal solid waste. Under the market participant doctrine, state and local government activities characterized as direct market participation are not subject to the constraints of the commerce clause. This article addresses the question of whether government intervention in interstate disposal of municipal solid waste is justified simply because the courts have established certain limited ways in which state and local governments may take such action.

The Market Participant Doctrine

The market participant doctrine was introduced in 1976 in Hughes v. Alexandria Scrap Corp (426 U.S. 794, 1976). According to this doctrine, as long as state and local governments demonstrate that they are active participants in a market,they are not subject to the usual constraints on interference with interstate commerce and may show preference to their own citizen.

Other important cases have refined the scope and limitations of the market participant doctrine. Reeves, Inc. v. Stake(2) (447 U.S. 429, 1980) affirmed the ability of states to restrict the supply of goods produced at state-owned facilities solely to its own citizens. In White v. Massachusetts Council of Construction Employers, Inc. (460 U.S. 204, 1983) the Supreme Court reaffirmed that state and local governments are not subject to commerce clause scrutiny when they are market participants. In South-Central Timber Development, Inc. v. Wunnicke (467 U.S. 82, 1984), however, the Supreme Court ruled that the extent of state and local governments' actions under the market participant doctrine cannot reach beyond the immediate market involved.

Dormant Commerce Clause: Government as Market Regulator

The dormant commerce clause has been invoked many times to challenge government laws and regulations designed to impede interstate disposal of municipal solid waste. One of the more significant cases is City of Philadelphia v. New Jersey (437 U.S. 617, 1978), in which the Supreme Court ruled that New Jersey's law banning the importation of out-of-state waste was protectionist and discriminatory and therefore unconstitutional under the dormant commerce clause. However, the Supreme Court left open the possibility that similar restrictions applying solely to publicly owned landfills might not be considered to be a consonant violation. This possibility has had important implications.(3)

Another significant case is Fort Gratiot Landfill v. Michigan Department of Natural Resources (504 U.S. 353, 1992). The Supreme Court extended dormant commerce clause scrutiny to political entities that are creations of state governments, ruling that the Michigan waste import restrictions violated the dormant commerce clause. The waste import restrictions prohibited the disposal of waste originating from outside of a county unless the county's plan specifically authorized such disposal. The Supreme Court found these restrictions to be discriminatory and to advance economic protectionism.(4)

In C&A Carbone, Inc. v. Town of Clarkstown, New York (511 U.S. 383, 1994), the Supreme Court ruled for the first time on the constitutionality of flow control under the dormant commerce clause. Clarkstown's imposition of flow control provided a means of guaranteeing the delivery of the minimum tons of municipal solid waste required by contract and thus the financing of a contractor's construction of a new transfer station along with the town's purchase of the transfer station after five years for one dollar. 5 C&A Carbone, a private company, opposed the flow control restrictions because of the ability to dispose of municipal solid waste at less costly out-of-state facilities. The Supreme Court found that the flow control ordinance regulated interstate commerce in the processing of solid waste by requiring that waste collected in Clarkstown be processed at the transfer station. Consequently, the Supreme Court declared the ordinance to be per se invalid as it discriminated against interstate commerce.

Dormant Commerce Clause: Government as Market Participant

In several cases the courts have sustained government actions that have interfered in the interstate commerce of municipal solid waste, both in the form of import and export restrictions, based on the market participant doctrine. In County Commissioners of Charles County v. Stevens (299 Md. 203, 1984) Charles County owned and operated the only landfill in the county and had implemented regulations prohibiting waste collected from outside of the county from being disposed of in the landfill. The Maryland Court of Appeals ruled that the county was a market participant in the market for landfill services and thus the market participant doctrine justified the exclusion of out-of-county waste.

Similarly, the district court in LeFrancois v. Rhode Island(669 F. Supp. 1204, D.R.I. 1987) found to be constitutional the prohibition of out-of-state waste at the state owned and operated Central Landfill, the only operating landfill in Rhode Island at the time. The Rhode Island Solid Waste Management Corporation, a public agency created by the state, had purchased the Central Landfill from a private firm. The district court cited County Commissioners of Charles County v. Stevens in drawing its conclusion that the Rhode Island Solid Waste Management Corporation was an active participant in the market for waste disposal services and was therefore exempt from the dormant commerce clause.(6)

Significantly, the Second Circuit Court of Appeals has ruled on two post-Carbone cases where the market participant doctrine was the crucial element in the decision to uphold export restrictions of locally collected municipal solid waste. In SSC Corporation v. Town of Smithtown (41 ERC 1241, 2d Cir., Sept. 19, 1995) Smithtown took two steps in order to ensure that it would be able to meet its financial obligations for the waste-to-energy facility jointly owned with the town of Huntington. First, the town passed a flow control ordinance. Further, Smithtown issued contracts for the collection and disposal of residential waste in each of 10 newly defined collection districts specifying that waste must be disposed of at the waste-to-energy facility. Based on Carbone, the Second Circuit Court of Appeals declared that the flow control ordinance violated the dormant commerce clause. However, the court ruled that Smithtown was a market participant with respect to the contracts for the collection and disposal of residential waste and thus the limitations of the dormant commerce clause did not apply.

In USA Recycling, Inc. v. Babylon (41 ERC 1254, 2d Cir., Sept. 19, 1995), the town of Babylon had created a commercial garbage collection district to help meet its minimum annual commitment of waste disposal at its waste-to-energy facility, which was operated by a private contractor. In the designated collection district, in place of the previous competitive system, the town became the sole provider of waste collection and disposal services to all commercial establishments. Babylon Source Separation Commercial, Inc., a local waste collection firm, was awarded an exclusive contract. As part of this contract, the town allowed Babylon Source Separation Commercial, Inc. to dispose of up to 96,000 tons of municipal solid waste per year for free at the incinerator using incinerating services the town had purchased from the facility's operator. In the court's opinion, the purchase of incinerating services counted as market participation. Granting these services to Babylon Source Separation Commercial, Inc. at no cost did not change the categorization of Babylon as a market participant and the associated immunity from the dormant commerce clause. Petersen and Abramowitz (1995) refer to the arrangements in Smithtown and Babylon as contract flow control.

The Supreme Court has let stand the Second Circuit's ruling in both Smithtown and Babylon thus validating the application of the market participant doctrine. Though the Supreme Court did not explicitly rule on either of the two cases, the fact that it allowed the Second Circuit Court of Appeals decisions to remain unchanged provides an important opportunity in some instances for waste management officials and policymakers to develop efficient disposal strategies for municipal solid waste. Efficient strategies are those that help to achieve the objective of cost-effective and environmentally sound disposal of municipal solid waste.

Economic Perspective of the Market Participant Doctrine

For waste management officials and policymakers, the critical issue arising out of these court cases is identifying the nexus between the legal construct of the market participant doctrine and the development of cost-effective and environmentally sound disposal strategies for municipal solid waste. Generally, free and open competition will assure the most efficient outcome. Economics limits the potential for government intervention in the marketplace to those situations where markets fail.(7) In the case of municipal solid waste disposal, the most pertinent market failures are likely to be the potential existence of negative externalities or the inability to incorporate elements of production costs into pricing decisions.

In order to determine whether there is a nexus between the market participant doctrine and economic efficiency in municipal solid waste disposal, it is necessary to answer the following questions. First, does some form of market failure exist? Second, if some form of market failure exists, under what conditions does the market participant doctrine foster efficiency in municipal solid waste disposal? In other words, controlling market failures in the area of waste disposal does not automatically require that governments become market participants. Other policy decisions could correct this problem, and it must be demonstrated that market participation on the part of the government is the best choice among these alternative policies.

In the presence of negative externalities, the price for a good or service fails to include all relevant costs, resulting in overuse of a resource such as waste disposal capacity. Suppose, for example, that disposing of municipal solid waste in a landfill resulted in soil or water degradation. A negative externality is present if the cost of this decline in environmental quality is not included in the tipping fee and the burden of this omitted cost falls on those who do not generate and then dispose of the municipal solid waste. However, as noted earlier, federal regulations are designed to eliminate negative externalities, appearing to contravene the need for restrictions on interstate waste disposal from an environmental and public health perspective without requiring market participation.(8) Further, government market participation would not be necessary because appropriate charges could be added to tipping fees to compensate for detrimental impacts. Therefore, justifying government market participation requires that waste disposal facilities be unable to incorporate elements of production costs into pricing decisions.

Scarcity costs and economies of scale are two types of cost elements that service or goods providers may fail to incorporate into pricing decisions. Scarcity costs are incurred when current waste disposal capacity is diminishing (e.g., landfill capacity is decreasing) and the cost of building future capacity will increase. Economies of scale describe the situation in which a waste disposal facility's average cost per ton of disposed waste decreases as disposal increases. In other words, the greater the number of units disposed of the lower the average cost of disposal per unit.

The inability of importing states or localities to incorporate scarcity into tipping fees represents a possible motivation for import restrictions. Tipping fees that do not include scarcity costs result in levels of waste disposal that exceed the appropriate level, and tend to lead to the perception that a state or locality is a dumping ground.(9)

Dunbar and Berkman (1987) argue that the underpricing of landfill disposal because of the failure to consider full costs results in the overuse of disposal capacity. According to their estimates, scarcity costs for a typical landfill comprise 50 to 65 percent of the full marginal cost of municipal solid waste disposal. Repetto et al. (1992) explain that the increase in the cost of developing future landfill capacity is a consequence of federal regulations, the time it takes to acquire needed permits, and other potentially omitted costs. According to Repetto et al. (1992), if the remaining life of a current landfill is five years, the range of potential scarcity costs is $6 to $10 per ton. This range rises to $9 to $14.50 per ton when remaining landfill capacity is sufficient for only one year.

The use of landfill capacity does not differ as a result of the origin of municipal solid waste. Therefore, using import restrictions to prevent those willing to pay the tipping fee from disposing of their waste is not justified from either an efficiency or planning perspective. In fact, Repa (1997) shows that more waste management jurisdictions are using interstate waste disposal and that the amount of municipal solid waste in commerce continues to rise, suggesting the rising importance of this option. Import restrictions represent a simplistic solution using government intervention to correct for the failure to establish a tipping fee that includes all relevant costs. The prudent course of action would be for a waste management jurisdiction to establish a tipping fee that includes scarcity costs and to levy this charge on all users of landfill capacity. By charging the appropriate price through full marginal cost pricing, the proper quantity of municipal solid waste will be disposed of and landfill capacity used in an optimal manner.

Still, the existence of economies of scale could justify government market participation in order to prohibit the export of municipal solid waste. The U.S. Environmental Protection Agency (1995) demonstrates that significant economies of scale exist for landfills whose capacity is 100 to 750 tons per day. Average costs decline approximately 65 percent in this interval, falling from $144 per ton to $48 per ton. Average costs continue to decline as capacity rises to 1500 tons per day. However, the magnitude of the economies of scale is significantly less. In the range of 750 to 1500 tons per day, average costs decline only 25 percent or $12 per ton. A report produced at the University of Tennessee (1991) provides additional evidence of economies of scale in landfilling. Model estimates of average costs per ton of waste disposed of shows a 77 percent decline as the number of tons disposed of in a facility per day rises from 25 tons to 500 tons. In general, these studies demonstrate consistent results for landfills of similar size. While the available information regarding waste-to-energy is not as large as the volume of information about landfilling, that which is available indicates that economies of scale do exist. U. S. Environmental Protection Agency (1995) shows, on average, that debt service as a result of capital costs represents more than 60 percent of net costs for waste-to-energy facilities. This value is 79 percent for mass burn facilities. Curlee et al. (1994) explain that small waste management jurisdictions may have to regionalize "waste-sheds" in order to be able to afford the often substantial capital costs.

Yet, economies of scale may only suggest that prohibiting export of municipal solid waste is appropriate. It is important to emphasize that the possibility of increased efficiency must be evaluated on a case by case basis. In order to capture the essence of the issue and exemplify many cases in which export restrictions are at question, consider a municipal solid waste management jurisdiction which seeks to send all waste to a single disposal facility. If the amount of waste disposed of is large and economies of scale have been exhausted, the facility is said to have achieved its minimum efficient scale. In other words, the minimum efficient scale has been reached when the average cost per ton of disposed waste is no longer decreasing. In order to determine whether average costs are decreasing, operators of waste disposal facilities need to implement a full cost accounting system that incorporates all costs discussed above, including those that may not often be considered such as scarcity costs. If the waste disposal facility is at the minimum efficient scale there is no need for export restrictions and the market should be permitted to function competitively. However, if the disposal facility is not operating at the minimum efficient scale then government intervention in the form of market participation represents a sound legal mechanism of implementation for state and local waste management officials. In this circumstance, the synthesis of economic efficiency and the market participant doctrine protects waste management jurisdictions and those to whom they provide service from incurring higher costs than otherwise necessary. On the other hand, if exporting municipal solid waste is found to be more cost effective as part of a case-by-case evaluation, this should be considered in determining the legitimate need for government market intervention.

Conclusion

The implementation of regulations designed to protect public health and the environment and the ability of the market for municipal solid waste disposal to develop adequate capacity appear to invalidate many often stated positions for government market intervention. Economics constrains government intervention in the marketplace to those situations where markets fail. Economies of scale area type of market failure that suggests that prohibiting export of municipal solid waste through the application of the market participant doctrine may be a cost-effective and prudent waste management policy in some instances. However, this potential outcome should be evaluated on a case-by-case basis. Waste management officials need to demonstrate that the level of waste disposed of is smaller than that which is necessary to achieve the minimum efficient scale of a disposal facility. In addition, the cost-effectiveness of exporting municipal solid waste should be considered as part of a case-by-case determination of the applicability of the market participant doctrine. Only through the proper application of Smithtown and Babylon, can waste management officials implement sound policies to manage the nation's municipal solid waste disposal in a manner that minimizes costs and optimizes the use of disposal capacity.

Acknowledgement

All views expressed in this paper are the authors' and do not necessarily reflect the official position of the U.S. Environmental Protection Agency. We would like to thank Robert Bohm, Chris Dockins, David Folz, George Garland, Robin R. Jenkins, Scott Palmer, Jean Peretz, and Teressa Wolff for their helpful comments and insight. All remaining errors are the responsibility of the authors.

Notes

(1.) A motive of-ten cited in the support off low control is that it is an administratively simple method of raising funds to finance disposal facilities.

(2.) This is predicated on successful implementation and enforcement of the applicable regulations. Successful implementation may rely not only on government efforts, but on citizen undertakings as well.

(3.) In footnote 6 of Philadelphia v. New Jersey, the Court wrote, "We express no opinion about New Jersey's power, consistent with the Commerce Clause to restrict to state residents access to state-owned resources ... or New Jersey's power to spend state funds solely on behalf of state residents and business."

(4.) Oregon Waste Systems, Inc., et al. v. Department of Environmental Quality of the State of Oregon, et al. 511 U.S. 93 (1994) and Chemical Waste Management, Inc. v. Hunt 504 U.S. (1992) demonstrate that broad discriminatory pricing schemes designed to prohibit the import of waste violate the dormant Commerce Clause for the same reasons as legislated bans on municipal solid waste itself.

(5.) Flow control was an instrument that the municipality used to collect taxes to build the transfer station without resorting to the regular legislative process of raising tax revenue. For more details see Posner (1971).

(6.) In Swin Resource Systems, Inc. v. Lycoming County (883 F.2d 245, 3d Cir., 1989) the Third Circuit Court of Appeals found that Lycoming County's pricing system, which charged higher tipping fees for waste from outside Lycoming County and its surrounding counties, was within the limits of the market participant doctrine. The Court explained that the landfill policy in this case applied solely to the publicly owned landfill and was therefore exempt from the restrictions of the dormant commerce clause.

(7.) While intervention within the context of this article pertains to market participation, taxes or limits to total market activity (e.g. tradable permits) are other examples of government involvement in the market place.

(8.) Where older unlined landfills still operate environmental and public health concerns may be an issue.

(9.) This may create a perception of inequity that likely fosters further resistance to interstate waste disposal on the part of importing states or localities. Full marginal cost pricing, discussed below, may help to alleviate such feelings as the amount of waste delivered to a facility will likely fall with the imposition of such a policy. In the context of low-level radioactive waste, Feldman, et al. (1994) discuss state-to-state interaction including data sharing and capacity planning as a means of reducing the perception of inequity.

References

Brownlee, John L. (1992). "The Market Participant Doctrine: Ammunition for the War on Trash." William and Mary Journal of Environmental Law 17(1): 59-77.

Curlee, T. Randall, Susan M. Schexnayder, David P. Vogt, Amy K. Wolfe, Michael P. Kelsay, and David L. Feldman (1994). Waste- To-Energy in the United States: A Social and Economic Assessment. West Port, CT: Quorum Books.

Dumars, Charles T. (1990). "State Market Power and Environmental Protection: A State's Right to Exclude Garbage in Interstate Commerce." New Mexico Law Review 21 (1): 37-61. Dunbar, Frederick C., and Mark P. Berkman (1987). "Sanitary Landfills Are Too Cheap!" Waste Age, May: 91-99.

Feldman, David L., Jean Peretz, and Barbara D. Jendrucko (1994). "Policy Gridlock in Waste Management: Balancing Federal and State Concerns." Policy Studies Journal 22(4): 589- 603.

Glebs, R.T. (March 1988). "Landfill Costs Continue to Rise." Waste Age, March: 84-93.

O'Leary, Rosemary (1997). "Trash Talk: The Supreme Court and the Interstate Transportation of Waste." Public Administration Review 57(4): 281-284.

Petersen, Eric S., and David N. Abramowitz (1995). "Municipal Solid Waste Flow Control in the Post-Carbone World." Fordham Urban Law Journal 22(2): 361-416.

Posner, Richard A. (1971). "Taxation by Regulation." Rand Journal of Economics. (Formerly known as Bell Journal of Economics and Management Science) 2(1): 22-50.

Repa, Edward W. (1997). "Interstate Movement: 1995 Update." Waste Age, June: 41-56.

-- and Allen Blakey (1996). "Municipal Solid Waste Disposal Trends: Update." Waste Age, May: 170-180.

Repetto, Robert, Roger C. Dower, Robin Jenkins and Jacqueline Geoghegan (1992). Green Fees: How a Tax Shift Can Work for the Environment and the Economy. Washington, DC: World Resources Institute.

University of Tennessee County Technical Assistance Service (1991). "Guidelines for Decision Makers: Solid Waste Management." E15-1570-00-009-92. Knoxville, TN: University of Tennessee.

U.S. Environmental Protection Agency (1995). Report to Congress on Flow Control and Municipal Solid Waste. EPA A530-R-95-008. Washington, DC: USEPA.

Michael J. Podolsky is an economist in the Office of Economy and Environment of the U.S. Environmental Protection Agency's Office of Policy. He earned his Ph.D. in energy and environmental management and policy from the Center for Energy and the Environment at the University of Pennsylvania. His research interests include the economics of solid waste management, natural resource use and law and economics.

Menahem Spiegel is professor of Economics at Rutgers University and Haifa University in Israel. He earned his Ph.D. in economics from the University of Chicago. his research interests include law and economics, the economics of regulation and natural resource and environomental economics.

Michael J. Podolsky U.S. Environmental Protection Agency Menahem Spiegel, Rutgers University
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Date:May 1, 1999
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