Discover more from Monday Morning Economist
Another Bottle Deposit Scheme
Discover how one family's recent recycling scheme pocketed millions, sparking questions about the effectiveness of incentives in shaping economic behavior.
In the sunny state of California, one audacious family stumbled upon a recycling jackpot, pocketing a staggering $7.6 million by recycling cans and bottles. But their earnings weren't without controversy. The secret to their success lay in the exploitation of incentives within California’s Beverage Container Recycling Program, designed to encourage consumers to recycle their beverage containers.
So, how does this system usually work? Well, every time you buy a plastic or aluminum bottle in California, you pay an additional five or ten cents as a deposit. When you return the container to a designated recycling center, you get that deposit back. Califonia is one of ten states with a beverage container deposit system in place. The system is supposed to motivate responsible recycling, protect the environment, and reduce landfill waste.
What happens to the deposit when people toss the container in the trash instead of returning it to a collection facility? The money that would have been returned to the original bottle buyer is usually either returned to the state, retained by distributors, or used to administer the program. For people who don’t return bottles and collect their deposit, the deposit essentially acts as a Pigouvian tax that raises the cost of consuming bottled beverages.
But here's the twist in our story – an entrepreneurial family identified what they had believed to be a profitable loophole in California’s system. They imported containers from Arizona, a state without a bottle deposit fee, and recycled them in California to claim the California Redemption Value (CRV) deposit refund.
So, by bringing 178 TONS of aluminum cans and plastic bottles from Arizona over an eight-month period, the family successfully took advantage of the price difference between the two states. They essentially pocketed the CRV refund without ever paying the initial deposit, exploiting the incentives meant to promote responsible recycling. They aren’t the first people tempted by the opportunity, but they are the most recent to be caught exploiting the system in a big way.
When prices diverge across regions, clever individuals might seize the opportunity to engage in arbitrage. You see, arbitrage refers to the practice of capitalizing on price differences for the same asset in different markets to secure a profit. You likely may have heard it phrased as “buy low, sell high.” That’s arbitrage in its simplest form.
In the case of the family's recycling scheme, the price difference between CRV-included bottles in California and non-CRV containers in Arizona became an alluring opportunity for arbitrage. But, as with any economic endeavor, arbitrage has its complexities and risks that require careful assessment.
And here's where it gets interesting! Do you remember that classic Seinfeld episode, "The Bottle Deposit"? Kramer and Newman embark on their own hilarious journey to capitalize on the difference between bottle deposit rates in New York and Michigan. If you don’t remember, here’s a quick recap of that famous episode:
Ah, good old Newman! His access to a cheaper transportation option allowed the two of them to move the containers across state lines, minimizing their costs and maximizing their profits. This demonstrates how the law of one price is a nice theory, but price differentials may still exist across borders due to taxes or transportation costs. Those cost differences look small but are big enough to prevent most arbitrage schemes like this one.
As fascinating as arbitrage can be, we must also consider its ethical dimensions. Engaging in arbitrage raises questions about fairness, market integrity, and adherence to regulations. It also raises some important questions about the effectiveness of monetary incentives in shaping economic behavior. Are they reliable mechanisms to achieve desirable outcomes, or do they sometimes create opportunities for exploitation and fraud?
In the case of the California family, they effectively collected millions in rebates from California taxpayers without paying a deposit in California or in their own home state of Arizona. California authorities are accusing the family of fraud, grand theft, and conspiracy. You read that right! The family's actions could lead to felony grand theft charges, and if convicted, they might face up to three years in state prison. But wait, there's more! Redemption of out-of-state containers could add another three years to their sentence.
Seinfeld had a knack for turning everyday experiences into comedic gold, and "The Bottle Deposit" episode was no exception, but seeing the implications of their scheme on a larger scale in California is worth pondering a bit more. The episode humorously portrays their adventures, but it underscores the profound implications that economic exploits can have. It's not just about profits or laughs; it's about understanding the forces that shape our choices, our markets, and our society.
At the start of the fiscal year 2022-2023, California’s Beverage Container Recycling Fund had a balance of $635,482,000 [State of California]
As part of the investigation, agents executed search warrants that led to the seizure of over $1 million worth of illegally imported beverage containers [LEX18 News]
In the first five months of 2023, California residents paid $548,744,364 in container deposits [California Department of Resources Recycling and Recovery]
Based on data from CRV revenues and expenditures, Californians recycled 74.9% of aluminum cans and 59.7% of glass bottles during the 2021-2022 fiscal year [California Department of Resources Recycling and Recovery]
The Bottle Deposit is the 33rd highest-rated episode of Seinfeld’s 173 total episodes [IMDB]