Christian Keuschnigg

Resource Dependence and Recycling

Recycling waste from used goods can substitute for scarce raw materials and reduce resource dependence. This paper presents a model of waste collection, recycling and final goods production using raw and recycled materials. Recycling acts like a multiplier of primary resources. When there are incomplete trash markets, recycling is inefficiently low. An optimal tax on trash combined with a demand subsidy can induce the Pareto optimal allocation. The tax subsidy scheme is self-financing and mimics a competitive market for trash. We study trade between a resource poor country exporting final goods and a resource rich country exporting raw materials. Expanding the recycling industry can reduce resource dependency of the industrialized country. We find rich welfare effects of trade policy with non-trivial interactions of terms of trade effects and distortions in recycling.