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Flexible Waste Management under Uncertainty

  • Luca Di Corato

    ()

    (Department of Economics, Swedish University of Agricultural Sciences)

  • Natalia Montinari

    ()

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

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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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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  1. Di Corato, Luca & Moretto, Michele, 2011. "Investing in biogas: Timing, technological choice and the value of flexibility from input mix," Energy Economics, Elsevier, vol. 33(6), pages 1186-1193.
  2. 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.
  3. Highfill, Jannett & McAsey, Michael, 1997. "Municipal Waste Management: Recycling and Landfill Space Constraints," Journal of Urban Economics, Elsevier, vol. 41(1), pages 118-136, January.
  4. Chang, Ni-Bin & Wang, S.F., 1997. "A fuzzy goal programming approach for the optimal planning of metropolitan solid waste management systems," European Journal of Operational Research, Elsevier, vol. 99(2), pages 303-321, June.
  5. Thomas C. Kinnaman, 2006. "Policy Watch: Examining the Justification for Residential Recycling," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 219-232, Fall.
  6. Benaroch, Michel & Webster, Scott & Kazaz, Burak, 2012. "Impact of sourcing flexibility on the outsourcing of services under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 219(2), pages 272-283.
  7. He, Hua & Pindyck, Robert S., 1992. "Investments in flexible production capacity," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 575-599.
  8. 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.
  9. Nagurney, Anna & Toyasaki, Fuminori, 2005. "Reverse supply chain management and electronic waste recycling: a multitiered network equilibrium framework for e-cycling," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 41(1), pages 1-28, January.
  10. Ready Mark J. & Ready Richard C., 1995. "Optimal Pricing of Depletable, Replaceable Resources: The Case of Landfill Tipping Fees," Journal of Environmental Economics and Management, Elsevier, vol. 28(3), pages 307-323, May.
  11. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  12. Mason, Charles F., 2001. "Nonrenewable Resources with Switching Costs," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 65-81, July.
  13. Jannett Highfill & Michael McAsey, 2001. "Landfilling Versus ``Backstop'' Recycling When Income Is Growing," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 19(1), pages 37-52, May.
  14. Fontes, Dalila B.M.M., 2008. "Fixed versus flexible production systems: A real options analysis," European Journal of Operational Research, Elsevier, vol. 188(1), pages 169-184, July.
  15. Triantis, Alexander J & Hodder, James E, 1990. " Valuing Flexibility as a Complex Option," Journal of Finance, American Finance Association, vol. 45(2), pages 549-65, June.
  16. Li, Shanling & Wang, Letian, 2010. "Outsourcing and capacity planning in an uncertain global environment," European Journal of Operational Research, Elsevier, vol. 207(1), pages 131-141, November.
  17. 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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