Deposit/Refund Systems The deposit/refund system attaches a front-end charge - the deposit - for the potential occurrence of a damaging activity, and guarantees a return of that charge (the refund) upon assurance that the activity has not been undertaken. It combines the incentive characteristic of a pollution charge with a built-in mechanism for controlling monitoring costs. Waste can be disposed properly or improperly. Improper or illegal waste disposal gives rise to a negative externality. Deposit/refund systems are meant to force the potential polluter to account for both the marginal private cost (MPC)and the marginal external cost (MEC) of improper waste disposal, should that activity be undertaken. The deposit component of the system is intended to capture the MEC of improper waste disposal. It forces the polluter to internalize the cost of any damage it may cause by making itabsorb this cost in advance. The refund introduces an incentive to dispose of wastes properly and prevent environmental damage from taking place at all. Taken together, the system targets the potentialpolluter instead of penalizing the actual polluter, using the refund to reward appropriate behavior. The Marginal Private Cost of Improper Waste Disposal (MPCIW)includes expenses for collecting and illegally dumping wastes plus the costs of improperly disposing recyclable wastes, such as the expense of trash receptacles, collection fees paid to a refuse company, and the opportunity costs of forgone revenue associated with recycling. The Marginal Social Cost of Improper Waste Disposal (MSCIW) includes the MPCIW plus the MECIWrepresented implicitly as the vertical distance between MSCIWand MPCIW. The Marginal Private Benefit of Improper Waste Disposal (MPBIW)is the demand for improper waste disposal. It is motivated by the avoidance of time and resources to collect wastes, bring nonrecyclables to a landfill, and take recyclables to a collection center. Since we assume no external benefits in this case, MPBIW = MSBIW. In the absence of environmental controls, equilibrium is determined by the intersection of MPBIWand MPCIW, or QIW. The efficient equilibrium occurs where MSCIW equals MSBIW, or at Qe, which is smaller than QIW. In the diagram above, the percentage of improper waste disposal is measured from left to right on the horizontal axis and the percentage of proper waste disposal is measured from right to left. To correct the negative externality associated with improper waste disposal, a deposit/refund system is instituted with the deposit equal to the MECIW measured at Qe. The deposit equal to the vertical distance ab shifts the MPCIW up to MSCIW forcing market participants to establish a new equilibrium at the socially optimal level, Qe. The result is an increase in the proportion of wastes properly disposed of from QIW to Qe. When a negative externality is present, too much improper waste disposal is produced; market participants do ...