Reconsideration of an advance disposal fee policy for end-of-life durable goods

Abstract

This paper analyzes the optimal waste disposal policy for durable goods. The existing literature does not differentiate between durable and non-durable goods and concludes that the social optimum can be attained by either a disposal fee (DF) policy or an advance disposal fee (ADF) policy in an economy without transaction costs. This study shows, however, that in such an economy the first-best policy is not an ADF policy but a DF policy. Adoption of an ADF policy results in excessive consumption and disposal compared to the social optimum. In addition, under an ADF policy the lifetime of durable goods is shorter than the social optimum. If we take transaction costs into account, we must consider the second-best policy. An ADF policy can be considered as second-best in some situations, since it has some transaction cost advantages over other policies. An ADF policy can be second-best either if net disposal cost is relatively low or if repair cost is relatively high.