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Flexible Waste Management under Uncertainty

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  • Luca Di Corato

    ()
    (Department of Economics, Swedish University of Agricultural Sciences)

  • Natalia Montinari

    ()
    (Strategic Interaction Group, Max Planck Institute of Economics, Jena)

Abstract

In this paper, we use stochastic dynamic programming to model the choice of a municipality which has to design an optimal waste management program under uncertainty about the price of recyclables in the secondary market. The municipality can, by undertaking an irreversible investment, adopt a flexible program which integrates the existing landfill strategy with recycling, keeping the option to switch back to landfilling, if profitable. We determine the optimal share of waste to be recycled and the optimal timing for the investment in such a flexible program. We find that adopting a flexible program rather than a non-flexible one, the municipality: i) invests in recycling capacity under circumstances where it would not do so otherwise; ii) invests earlier, and iii) benefits from a higher expected net present value.

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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2012-066.

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Date of creation: 11 Dec 2012
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Handle: RePEc:jrp:jrpwrp:2012-066

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Keywords: Real Options; Flexibility; Municipal Waste; Recycling;

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  1. Michele Moretto & Luca Di Corato, 2009. "Investing in Biogas: Timing, Technological Choice and the Value of Flexibility from Inputs Mix," Working Papers 2009.84, Fondazione Eni Enrico Mattei.
  2. Anni Huhtala, 1997. "A Post-Consumer Waste Management Model for Determining Optimal Levels of Recycling and Landfilling," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 10(3), pages 301-314, October.
  3. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  4. Kinnaman, Thomas C. & Fullerton, Don, 2000. "Garbage and Recycling with Endogenous Local Policy," Journal of Urban Economics, Elsevier, vol. 48(3), pages 419-442, November.
  5. Michele Moretto & Gianpaolo Rossini, 2012. "Flexible Outsourcing[1]," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 33, pages 47-59, 01.
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