Resource and waste taxation in the theory of the firm with recycling activities

The management of solid waste has become an urgent problem in nations with a great population density. Accordingly, waste reduction through source red uction and recycling has become increasingly important. Our purpose is to s how how prevention, recycling and disposal of waste could be part of a theo ry of the firm. We first derive efficient production functions from product ion processes with waste as a by-product. Waste obtained as new scrap can p artially be recycled by using additional inputs in order to cut back the pu rchase of virgin material. Waste not completely recyclable will leave the f irm as disposal which also entails cost to the firm. We use the dual cost f unction approach to develop a theory of the firm under solid residual manag ement. Since the producer does not bear the full cost of disposal, there will be a bias toward virgin materials and away from recycling. The goal of the gove rnment is to stimulate the firms to recycle with respect to the preservatio n of exhaustible resources. An incentive to recycle is a tax on resources o r on waste. In order to determine the tax levels the government maximizes w elfare subject to the dynamic constraint for decumulation of land fill for waste deposits. This gives the user cost and its time profile for taxing wa ste disposal or virgin material. In a comparative statics analysis we compare the effect of taxes on waste v s. virgin material on effort to produce in a resource saving manner, on the quantity of recycled material, on output, and on the reduction of waste. S ince the impact of environmental regulation on employment is important, our model detects seven effects on labor demand as part of resource conservati on policy. We finally carry out a comparative statics analysis of waste int ensive firms operating in different market structures. Of interest is the i mpact of a resource or waste taxation on market volume, on the number of fi rms, on resource saving effort, and on profit.