Efficient recycling

We elaborate a model of the market economy, where material inputs are produced by the primary sector as virgin resources or produced by the recycling sector as secondary resources, emphasizing the supply-side linkages between virgin and recycled materials. We posit a representative structure of the recycling value chain and use it to analyze how market mechanisms can explain the heterogeneity in recycling rates across materials and sectors. Two situations can emerge: either part of recyclable materials is disposed of as definite waste, or there is a lasting scarcity of recyclable materials. If the possibility of recycling end-of-life products is socially valuable, the additional value is transmitted to the primary resource producers through prices. In the presence of market failure due to negative externalities from waste disposal, the optimal policies can involve a Pigouvian tax on waste disposal, a combination of virgin output tax and recycling subsidy (the deposit-refund system), or a minimum recycled content regulation. However, we show that when recyclable materials are scarce, the optimal policy mix can imply a tax on recycling. When it comes to market failure due to natural monopoly power at the stage of recovery of EOL products, we show that the widespread average cost pricing regulation of waste management utilities threatens the efficient transmission of the value chain. From the perspective of increasing the use of mineral resources for energy transition, our paper highlights the crucial role recycling can play and how policy tools should be flexibly adapted to address these challenges.