Recovery Targets and Taxation/Subsidy Policies to Promote Product Reuse

This paper seeks to identify the optimal policies for promoting product recovery and remanufacturing. Using a stylized equilibrium model, we analyze the problem as a Stackelberg game between a regulator and a monopolistic firm. We compare three types of policies that legislated regulation could effect: (i) A recovery target policy that requires firms to recover no less than a specified fraction of their production for proper disposal or possible remanufacturing; (ii) a taxation policy that both taxes manufacturing and subsidizes remanufacturing; and (iii) a newly introduced mixed approach that incorporates a recovery target as well as taxes and subsidies. We study a firm's behavior under the three policy types, including pricing decisions for new and remanufactured products as well as the strategic decision of whether to create a secondary channel for remanufactured products. We find that legislative intervention makes it more likely that firms will maintain a single-market strategy. We further demonstrate the mixed approach's superiority as measured by a comprehensive set of economic and environmental criteria, and show that this finding is robust under two different objective functions for the policy maker, one that does and one that does not entail a budget neutrality constraint.