The Impacts of Sharing Responsibility for Product Recovery across the Supply Chain

Abstract

Extended Producer Responsibility (EPR) programs typically hold the producer - a single actor defined by the regulator - responsible for the environmental impacts of end-of-life products. This is despite emphasis on the need to involve all actors in the supply chain in order to best achieve the aims of EPR. In this paper, we examine the important economic and environmental implications of sharing EPR program costs. We use a steady-state, two-echelon supply chain model to determine the impacts of product collection and recycling mandates on the incentive to recycle, and resulting profits in the integrated and decentralized supply chains. For the decentralized supply chain, we demonstrate how the sharing of EPR program costs between the echelons can improve total supply chain profit and suggest a contract menu that can Pareto-improve profits in the decentralized supply chain. To examine both the economic and environmental performance associated with the sharing of program costs, we propose a social welfare construct that includes supply chain profit, consumer surplus, and the externalities associated with virgin material extraction, product consumption, and disposal of non-recycled products. Using a numerical example, we discuss how EPR program cost sharing may or may not improve social welfare. The results of this paper are of value to firms either anticipating or subject to product recovery legislation, and to social planners that attempt to balance the economic and environmental impacts and ensure the fairness of such legislation.