This study examines optimal environmental taxation and subsidies in a materials-product (M-P) chain. This incorporates the main economic activities extraction, production, consumption, recycling and waste treatment. A static general equilibrium model of this M-P chain is constructed, with environmental impacts represented as negative externalities generated by natural resource extraction and final dumping of waste. The model includes various environmental taxes and subsidies on products and materials to pay for these externalities. The originality of this analytical exercise is twofold: in all stages of the M-P chain materials balance conditions are satisfied; furthermore, recycling is explicitly included as a separate activity with inputs, outputs and objectives. Thus, the paper combines physical-environmental and welfare economic perspectives on materials flows. The results show that the externalities generated by extraction and harmful waste can only be optimized by imposing a direct tax on the new materials. In a second-best world the externalities may be sub-optimized by taxing the generation of harmful waste or by subsidizing the use of recycled materials. Changes in some variables causes a shift between the optimal taxes on new materials at the beginning and harmful waste at the end of the M-P chain. This linkage is interesting because it shows that the whole M-P chain needs to be considered instead of parts of this chain.
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