Uri Regev, Ben-Gurion University of the Negev

Abstract

This paper deals with the combined effects of uncertainty and investment costs on the decision of a municipality to switch from landfill waste disposal to recycling. We show that uncertainty regarding the price of recycled materials may induce a risk neutral municipality to prefer landfill disposal, even when recycling is less expensive. This result stems from the option value associated with the possibility to switch between the two technologies at any time. Consequently, a policy designed to reduce uncertainty can be preferable to Pigouvian taxes or to subsidies as a means to enhance recycling when high investment costs are required for such a switch. We estimate the parameters of a theoretical model with empirical data from 79 municipalities in Israel. The empirical results support the observation that price stabilization can be effective to establish viable recycling markets.

Keywords: Uncertainty, irreversible investment, recycling, waste, government policy.

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