Optimal policies for international recycling between developed and developing countries

This paper presents a model of waste product trade between a developed and a developing country. North firms produce products that are consumed exclusively in North. After consumption, parts of them are exported from North to South. This export may be illegal. The remaining portion of the waste products are collected and recycled by firms in North. Firms in South engage exclusively only in recycling. The South government is unable to find illegal dumping of recycled waste products because of an inadequate governance capacity. Therefore, we assume that the South government subsidizes recycled material. The model addresses five scenarios: closed economy, the first best, strategic government, selfish North government and inactive South government, and benevolent North government and inactive South government. Among these scenarios, only the first best outcome needs a negative tariff for waste-product import to South. A limitation of the strategic government case is that the South government must finance the subsidy. In the selfish North government case, North benefits by avoiding collection and recycling costs by outflow of waste into South. The South environment, however, would enormously deteriorate due to the absence of a policy. If the North government is benevolent, it imposes an export tax on waste products to South to curb it.