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Publicado en: Documento de trabajo

A Market-Based Recycling Subsidy

Rodrigo Harrison; Raimundo Atal; Jose A. Carrasco

Documento de Trabajo IE-PUC, N° 441, 2013.

When direct taxation on waste disposal is not a feasible option, it is well established that a combination of a tax on production and a subsidy on recycling is necessary to attain efficient levels of waste disposal. The main disadvantage of these two-part instruments is the administrative burden imposed on government mainly due to its multiple roles in collecting the tax and computing and allocating the subsidy. We propose a new instrument that achieves the social optimum at lower administrative burden on government: a tax on production and a marketdetermined subsidy on recycling. In this market, recyclers — in addition to selling recycled material — may sell credits that can be used by firms to reduce their tax-base. We show that the market price of the credit replicates the recycling subsidy results without direct intervention of the government. Additionally, we show that our proposed instrument can be specifically designed to also provide incentives for efficient “design for environment”.


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