Optimal environmental policy for waste disposal and recycling when firms are not compliant
We investigate a model that considers disposal and recycling activities after the consumption of products. In the field, the deposit-refund (D-R) policy has been considered as an ideal policy for internalizing disposal costs, which can result in the realization of the first-best policy. However, the possibility of firms' illegal disposal has been neglected. We introduce a monitoring cost to prevent firms from disposing of collected residuals illegally and induce the second-best D-R policy. We find that the relation between the monitoring problem for firms and the price of the recycling market brings about a variation in the optimal level of the refunds (which is typically smaller than the first-best level). Further, we investigate an alternative policy that requires producers to take-back residuals and show how this policy works equivalently to the second-best D-R policy by applying the theory of the tradable rights market.
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