SEQ CHAPTER \h \r 1 A Study of Potential Effects of Market Forces on
the Management

of Hazardous Secondary Materials Intended for Recycling

EPA Office of Solid Waste

Initial Drafts Prepared and Submitted for EPA Review By:

ICF International

9300 Lee Highway

Fairfax, VA, 22031

November 21, 2006Executive Summary

Recycling of hazardous waste supports a variety of environmental goals,
including reduced generation of waste and reduced use of virgin
materials and landfill space.  Proposed revisions to EPA’s definition
of solid waste identify certain recyclable hazardous secondary material
as not being subject to regulation as hazardous waste, thus removing
some of the regulatory burdens for managing those materials.  A
potential concern with these revisions, however, is that the economic
forces that shape firm recycling behavior might differ from those that
shape manufacturing decisions.  Through a closer look at how market
forces can affect materials management for various types of recycling,
this paper aims to help EPA evaluate these proposed regulatory changes.

Despite the societal-level benefits of hazardous waste recycling, an
examination of current damage cases and public comments on EPA’s
proposed revisions of the definition of hazardous waste reveal cases
where hazardous waste recycling has not achieved the beneficial outcomes
mentioned above.  The objective of the paper is to use economic theory
to examine and attempt to explain the market forces that may contribute
to both sub-optimal and optimal outcomes from hazardous waste recycling.

From a societal point of view, an optimal amount of an economic activity
is the amount which maximizes the net benefits (private and social
benefits minus private and social costs).  At this point, the marginal
benefits of the activity (the benefits associated with the last unit of
the activity) equal the marginal costs of it (the costs associated with
providing that last unit).  Any deviation from this point leads to a
sub-optimal outcome where too little or too much of the activity is
occurring from a societal point of view.    For the case of hazardous
waste recycling, a situation of too little recycling would result in
inefficiencies, in that an increased rate of recycling (due, for
example, to EPA’s proposed changes) could realize additional net
benefits.

The focus of this paper, however, is on situations where sub-optimal
outcomes result from too much of an activity.  For hazardous waste
recycling, this situation occurs when firms are accumulating too much
waste without actually recycling it, or are operating their recycling
operation in a way that imposes excessive costs on society (such as
excess pollution or mishandling of waste).  Thus, while hazardous waste
recycling is not an inherently damaging activity, damages can result
from it if recycling is practiced in a way that generates excessive
social costs.  A move from a sub-optimal to an optimal amount of
recycling may thus involve two different sets of activities.  First
would be a reduction in waste mismanagement that result from hazardous
waste recycling, which would increase the social benefits and lower the
social costs of recycling operations (e.g., reduce leakages, spills).
Second would be cessation of activities that occur under the guise of
recycling but have little or no benefits and large costs, such as
“sham recycling.”

In this paper, we present economic models to provide information on how
economic forces could influence different kinds of hazardous waste
recycling.  These economic models are based on three distinct kinds of
hazardous waste recycling that occur at commercial and industrial firms.
 The models discussed in this paper include one for businesses that are
primarily waste handlers, and two for industrial firms that manufacture
a primary product and generate hazardous waste as a byproduct:

Commercial Recycling The primary business of these firms is handling
hazardous waste and producing secondary materials.  Wastes are accepted
for recycling from offsite industrial sources (usually for a fee), and
may be returned to the same generator or to another company and/or
different industry.

Industrial Intra-company Recycling These firms generate hazardous waste
as a byproduct in their main production process and, with the objective
of reducing their waste management costs, recycle the waste for sale or
for their own reuse in production.

Industrial Inter-Company Recycling These firms use or recycle hazardous
waste obtained from other firms with the objective of reducing the cost
of their production inputs.

In the paper, we discuss these models of recycling in terms of the
associated revenues and costs (both direct and indirect).  Based on
information from the models, we define characteristics of hazardous
waste recycling that are hypothesized to contribute to sub-optimal
outcomes.  We then use economic theory to provide information on how
these characteristics might influence recycling at different kinds of
firms.  These characteristics are

The value of the recycled product;

Price volatility of recycling output or inputs; and

The net worth of the firm.

Based on these characteristics, we identify certain economic conditions
that could be seen as increasing the likelihood of waste mismanagement
occurring during hazardous waste recycling activities.  These conditions
are

A low market value for the recycled product;

Unstable prices for the recycled product or any inputs to recycling; and

Firms with low net worth.

One similarity of the characteristics and conditions described above is
that they are at least to some degree observable or could be observable
given availability of data.  In addition to these observable
characteristics, we present additional factors that could contribute to
sub-optimal recycling.  These additional factors arise due to economic
conditions known as market failure, and differ from the above
characteristics in that they are not readily observable from firm or
market data.  These market failures are

Imperfect information; and

Externalities.

The first source of market failure, imperfect information, suggests that
some firms may enter into the hazardous waste recycling market with
incorrect information on the true costs or revenues involved.  The
second source of market failure, externalities, occur when the true
societal costs that result from a hazardous waste recycling operation
are not borne by the firm, encouraging the firm to produce more recycled
product than it would if it had to pay the full social costs of its
operation.  Identifying these sources of market failure can point to
potential solutions to the problems it causes.  Similarly, knowing how
the hazardous waste recycling market is affected by externalities can
point the way toward policies that “internalize” them, and lead to
reduced damages.

Table of Contents

  TOC \o "1-3" \h \z \u    HYPERLINK \l "_Toc137208528"  1.	Introduction
  PAGEREF _Toc137208528 \h  8

  HYPERLINK \l "_Toc137208529"  1.1.	Regulatory Framework for Hazardous
Waste Recycling	  PAGEREF _Toc137208529 \h  10

  HYPERLINK \l "_Toc137208530"  1.1.1.  	Full Regulation	  PAGEREF
_Toc137208530 \h  12

  HYPERLINK \l "_Toc137208531"  1.1.2.  	Exemptions	  PAGEREF
_Toc137208531 \h  12

  HYPERLINK \l "_Toc137208532"  1.1.3.  	Special Standards	  PAGEREF
_Toc137208532 \h  13

  HYPERLINK \l "_Toc137208533"  1.2.	Snapshot of the Current State of
Hazardous Materials Recycling	  PAGEREF _Toc137208533 \h  13

  HYPERLINK \l "_Toc137208534"  1.3.	Models of Hazardous Waste Recycling
  PAGEREF _Toc137208534 \h  14

  HYPERLINK \l "_Toc137208535"  1.4.	Outline of the Theoretical Analysis
  PAGEREF _Toc137208535 \h  16

  HYPERLINK \l "_Toc137208536"  2.	Theoretical Analysis	  PAGEREF
_Toc137208536 \h  17

  HYPERLINK \l "_Toc137208537"  2.1.	Commercial Hazardous Waste
Recycling	  PAGEREF _Toc137208537 \h  17

  HYPERLINK \l "_Toc137208538"  2.1.1.	Revenue Structure of Commercial
Recyclers	  PAGEREF _Toc137208538 \h  18

  HYPERLINK \l "_Toc137208539"  2.1.2.	Direct Costs of Commercial
Recyclers	  PAGEREF _Toc137208539 \h  19

  HYPERLINK \l "_Toc137208540"  2.1.3.	Indirect Costs of Commercial
Recyclers	  PAGEREF _Toc137208540 \h  19

  HYPERLINK \l "_Toc137208541"  2.1.4.	Model of Commercial Recyclers
PAGEREF _Toc137208541 \h  21

  HYPERLINK \l "_Toc137208542"  2.2.	Industrial Intra-company Recycling
 PAGEREF _Toc137208542 \h  23

  HYPERLINK \l "_Toc137208543"  2.2.1.	Revenue Structure of Industrial
Intra-company Recycling	  PAGEREF _Toc137208543 \h  24

  HYPERLINK \l "_Toc137208544"  2.2.2.	Direct Costs of Industrial
Intra-company Recycling	  PAGEREF _Toc137208544 \h  25

  HYPERLINK \l "_Toc137208545"  2.2.3.	Indirect Costs of Intra-company
Recycling	  PAGEREF _Toc137208545 \h  26

  HYPERLINK \l "_Toc137208546"  2.2.4.	Model of Intra-Company Recycling
 PAGEREF _Toc137208546 \h  27

  HYPERLINK \l "_Toc137208547"  2.3.	Industrial Inter-company Recycling
 PAGEREF _Toc137208547 \h  29

  HYPERLINK \l "_Toc137208548"  2.3.1.	Revenue Structure for Industrial
Inter-company Recyclers	  PAGEREF _Toc137208548 \h  30

  HYPERLINK \l "_Toc137208549"  2.3.2.	Direct Costs for Industrial
Inter-company Recycling	  PAGEREF _Toc137208549 \h  30

  HYPERLINK \l "_Toc137208550"  2.3.3.	Indirect Costs of Inter-company
Recycling	  PAGEREF _Toc137208550 \h  31

  HYPERLINK \l "_Toc137208551"  2.3.4.  	Model of Industrial
Inter-company Recycling	  PAGEREF _Toc137208551 \h  32

  HYPERLINK \l "_Toc137208552"  2.4.	Market Failures	  PAGEREF
_Toc137208552 \h  34

  HYPERLINK \l "_Toc137208553"  2.4.1.	Imperfect Information	  PAGEREF
_Toc137208553 \h  35

  HYPERLINK \l "_Toc137208554"  2.4.2.	Externalities	  PAGEREF
_Toc137208554 \h  39

  HYPERLINK \l "_Toc137208555"  3.	Discussion and Conclusion	  PAGEREF
_Toc137208555 \h  42

  HYPERLINK \l "_Toc137208556"  3.1.	Discussion of Observable Firm and
Market Characteristics	  PAGEREF _Toc137208556 \h  42

  HYPERLINK \l "_Toc137208557"  3.2.      Empirical Evidence for
Observable Firm and Market Characteristics	  PAGEREF _Toc137208557 \h
43

  HYPERLINK \l "_Toc137208558"  3.2.1.  Value of the Recycled Product
PAGEREF _Toc137208558 \h  44

  HYPERLINK \l "_Toc137208559"  3.2.2.  Stability of Prices	  PAGEREF
_Toc137208559 \h  46

  HYPERLINK \l "_Toc137208560"  3.2.3.  Net Worth of the Firm	  PAGEREF
_Toc137208560 \h  48

  HYPERLINK \l "_Toc137208561"  3.3.  	Discussion of Unobservable Firm
and Market Characteristics	  PAGEREF _Toc137208561 \h  48

  HYPERLINK \l "_Toc137208562"  3.4.  	Conclusion	  PAGEREF
_Toc137208562 \h  49

  HYPERLINK \l "_Toc137208563"  Appendix I – Literature Review
PAGEREF _Toc137208563 \h  50

  HYPERLINK \l "_Toc137208564"  Appendix II – Empirical Analysis
PAGEREF _Toc137208564 \h  54

  HYPERLINK \l "_Toc137208565"  References	  PAGEREF _Toc137208565 \h
90

 List of Exhibits

  TOC \h \z \c "Exhibit"    HYPERLINK \l "_Toc137208575"  Exhibit 1-1:
Hazardous Waste Managed in 2003	  PAGEREF _Toc137208575 \h  14

  HYPERLINK \l "_Toc137208576"  Exhibit 1-2: Hazardous Waste Recycled,
2003	  PAGEREF _Toc137208576 \h  14

  HYPERLINK \l "_Toc137208577"  Exhibit 2-1: Diagram of Commercial
Recycling	  PAGEREF _Toc137208577 \h  18

  HYPERLINK \l "_Toc137208578"  Exhibit 2-2: Model of Commercial
Recyclers	  PAGEREF _Toc137208578 \h  23

  HYPERLINK \l "_Toc137208579"  Exhibit 2-3: Diagram of Industrial
Intra-company Recycling	  PAGEREF _Toc137208579 \h  24

  HYPERLINK \l "_Toc137208580"  Exhibit 2-4: Model of Industrial
Intra-company Recyclers	  PAGEREF _Toc137208580 \h  29

  HYPERLINK \l "_Toc137208581"  Exhibit 2-5: Industrial, Inter-company
Recycling	  PAGEREF _Toc137208581 \h  30

  HYPERLINK \l "_Toc137208582"  Exhibit 2-6: Model of Inter-company
Recycling	  PAGEREF _Toc137208582 \h  34

  HYPERLINK \l "_Toc137208583"  Exhibit 2-7: Imperfect Information for
Commercial Recyclers	  PAGEREF _Toc137208583 \h  36

  HYPERLINK \l "_Toc137208584"  Exhibit 2-8: Uncertainty in the Demand
for Recycled Products	  PAGEREF _Toc137208584 \h  39

  HYPERLINK \l "_Toc137208585"  Exhibit 2-9: Negative Externalities in
the Hazardous Waste Recycling Market	  PAGEREF _Toc137208585 \h  41

  HYPERLINK \l "_Toc137208586"  Exhibit 3-1: Type of Recycling for Five
Selected Hazardous Wastes	  PAGEREF _Toc137208586 \h  44

  HYPERLINK \l "_Toc137208587"  Exhibit 3-2: Product Value and
Acceptance Fees	  PAGEREF _Toc137208587 \h  46

  HYPERLINK \l "_Toc137208588"  Exhibit 3-3: Price Volatility – Mean
and Standard Deviation	  PAGEREF _Toc137208588 \h  47

  HYPERLINK \l "_Toc137208589"  Exhibit 3-4: Multiple Use	  PAGEREF
_Toc137208589 \h  48

  HYPERLINK \l "_Toc137208590"  Exhibit A-1: Average Cost of Hazardous
Waste Management	  PAGEREF _Toc137208590 \h  56

  HYPERLINK \l "_Toc137208591"  Exhibit A-2: Waste Handling Method and
Geographic Distribution for 71 Facilities Handling Lead-Acid Batteries
(2003)	  PAGEREF _Toc137208591 \h  58

  HYPERLINK \l "_Toc137208592"  Exhibit A-3: Waste Management Methods
for Lead-Acid Batteries at 29 Facilities (2003)	  PAGEREF _Toc137208592
\h  58

  HYPERLINK \l "_Toc137208593"  Exhibit A-4: Recycling of Lead-Acid
Batteries – Flow of Hazardous Waste, by Industry (2003)	  PAGEREF
_Toc137208593 \h  59

  HYPERLINK \l "_Toc137208594"  Exhibit A-5: Distribution of Facilities
Recycling Lead-Acid Batteries, by Industry (2003)	  PAGEREF
_Toc137208594 \h  60

  HYPERLINK \l "_Toc137208595"  Exhibit A-6: Characteristics of
Industries in Which Some Facilities are Engaged in Recycling Lead-Acid
Batteries	  PAGEREF _Toc137208595 \h  61

  HYPERLINK \l "_Toc137208596"  Exhibit A-7: Primary and Secondary
Production of Lead, 1970-2002	  PAGEREF _Toc137208596 \h  61

  HYPERLINK \l "_Toc137208597"  Exhibit A-8: Lead Recovered from Scrap
Processed, 2002-2003	  PAGEREF _Toc137208597 \h  62

  HYPERLINK \l "_Toc137208598"  Exhibit A-9: Annual Price of Lead,
1970-2002	  PAGEREF _Toc137208598 \h  62

  HYPERLINK \l "_Toc137208599"  Exhibit A-10: Summary Statistics for the
Annual Price of Lead ($/ton)	  PAGEREF _Toc137208599 \h  63

  HYPERLINK \l "_Toc137208600"  Exhibit A-11: Booms and Slumps in the
Commodity Prices	  PAGEREF _Toc137208600 \h  63

  HYPERLINK \l "_Toc137208601"  Exhibit A-12: Consumption of Lead by
Product (in metric tons), 2002-2003	  PAGEREF _Toc137208601 \h  64

  HYPERLINK \l "_Toc137208602"  Exhibit A-13: Waste Handling Method and
Geographic Distribution for 73 Facilities Handling Brass Dust (2003)
PAGEREF _Toc137208602 \h  65

  HYPERLINK \l "_Toc137208603"  Exhibit A-14: Waste Management Methods
for Brass Dust at 43 Facilities (2003)	  PAGEREF _Toc137208603 \h  66

  HYPERLINK \l "_Toc137208604"  Exhibit A-15: Recycling of Brass Dust -
Flow of Hazardous Waste, by Industry (2003)	  PAGEREF _Toc137208604 \h
66

  HYPERLINK \l "_Toc137208605"  Exhibit A-16: Distribution of Facilities
Recycling Brass Dust, by Industry (2003)	  PAGEREF _Toc137208605 \h  67

  HYPERLINK \l "_Toc137208606"  Exhibit A-17: Characteristics of
Industries in Which Some Facilities are Engaged in Recycling Brass Dust
 PAGEREF _Toc137208606 \h  68

  HYPERLINK \l "_Toc137208607"  Exhibit A-18: Primary and Secondary
Production of Zinc, 1970-2002	  PAGEREF _Toc137208607 \h  69

  HYPERLINK \l "_Toc137208608"  Exhibit A-19: Annual Price of Zinc,
1970-2005	  PAGEREF _Toc137208608 \h  69

  HYPERLINK \l "_Toc137208609"  Exhibit A-20: Summary Statistics for the
Annual Price of Zinc	  PAGEREF _Toc137208609 \h  70

  HYPERLINK \l "_Toc137208610"  Exhibit A-21: Price Index of Zinc
Compared to Price Index of Iron and Steel,	  PAGEREF _Toc137208610 \h
71

  HYPERLINK \l "_Toc137208611"  Exhibit A-22: Spent Pickle Liquor –
Industry Management (2004)	  PAGEREF _Toc137208611 \h  73

  HYPERLINK \l "_Toc137208612"  Exhibit A-23: Iron and Steel Production,
1970 – 2002	  PAGEREF _Toc137208612 \h  74

  HYPERLINK \l "_Toc137208613"  Exhibit A-24: Waste Handling Method and
Geographic Distribution for 34 Facilities Handling Spent Pickle Liquor
(2003)	  PAGEREF _Toc137208613 \h  75

  HYPERLINK \l "_Toc137208614"  Exhibit A-25: Waste Management Methods
for Spent Pickle Liquor at 34 Facilities (2003)	  PAGEREF _Toc137208614
\h  76

  HYPERLINK \l "_Toc137208615"  Exhibit A-26: Waste Handling Method and
Geographic Distribution for 426 Facilities Handling Solvents (2003)
PAGEREF _Toc137208615 \h  78

  HYPERLINK \l "_Toc137208616"  Exhibit A-27: Waste Management Methods
for Solvents at 426 Facilities (2003)	  PAGEREF _Toc137208616 \h  79

  HYPERLINK \l "_Toc137208617"  Exhibit A-28: Recycling of Solvent -
Flow of Hazardous Waste, by Industry (2003)	  PAGEREF _Toc137208617 \h
80

  HYPERLINK \l "_Toc137208618"  Exhibit A-29: Distribution of Facilities
Recycling Solvents, by Industry	  PAGEREF _Toc137208618 \h  81

  HYPERLINK \l "_Toc137208619"  Exhibit A-30: Characteristics of
Industries in Which Some Facilities are Engaged in Recycling Solvents
PAGEREF _Toc137208619 \h  82

  HYPERLINK \l "_Toc137208620"  Exhibit A-31: Demand of Virgin
Trichloroethylene, Methyl Ethyl Ketone, and Perchloroethylene (1996 –
2002)	  PAGEREF _Toc137208620 \h  82

  HYPERLINK \l "_Toc137208621"  Exhibit A-32: Price of Virgin
Trichloroethylene, Methyl Ethyl Ketone, and Perchloroethylene (1996 –
2002)	  PAGEREF _Toc137208621 \h  83

  HYPERLINK \l "_Toc137208622"  Exhibit A-33: Summary Statistics for the
Annual Price of Virgin Trichloroethylene, Methyl Ethyl Ketone and
Perchloroethylene (1996 – 2002)	  PAGEREF _Toc137208622 \h  83

  HYPERLINK \l "_Toc137208623"  Exhibit A-34: Price for Virgin and
Reclaimed Trichloroethylene, Methyl Ethyl Ketone and Perchloroethylene
(1997)	  PAGEREF _Toc137208623 \h  84

  HYPERLINK \l "_Toc137208624"  Exhibit A-35: Estimated Price for
Reclaimed Trichloroethylene, Methyl Ethyl Ketone and Perchloroethylene
(2001)	  PAGEREF _Toc137208624 \h  84

  HYPERLINK \l "_Toc137208625"  Exhibit A-36: Number of Drums
Reconditioned Annually	  PAGEREF _Toc137208625 \h  85

  HYPERLINK \l "_Toc137208626"  Exhibit A-37: Total Number of Industrial
Container and Drum Cleaning (ICDC) Facilities	  PAGEREF _Toc137208626 \h
 86

  HYPERLINK \l "_Toc137208627"  Exhibit A-38: Characteristics of the
Markets for Recycled Materials	  PAGEREF _Toc137208627 \h  88

1.	Introduction

In October 2003, EPA proposed revisions to the definition of solid waste
(68 FR 61558).  These proposed revisions identify certain recyclable
hazardous secondary materials as not being subject to regulation as
hazardous wastes.  Part of the rationale for this approach is that some
types of recycling are considered more akin to manufacturing than waste
management and therefore less in need of regulation.   [“In EPA’s
view, a recycler will value secondary materials that provide an
important contribution to his process or product and will manage them in
a manner consistent with a valuable feedstock material (i.e., will
manage them to minimize their loss)”; 68 FR 61583].

As pointed out by some commenters to the proposed rule, the economic
forces shaping firm recycling behavior might be different than those at
play in manufacturing processes using virgin materials.  For example,
the inherent value of hazardous material is often very low compared to
virgin materials used in manufacturing, resulting in a different set of
economic incentives.  Additionally, different economic incentives
between hazardous waste recycling and manufacturing may arise due to
differences in these two business models.  As opposed to manufacturing,
where the cost of inputs is greater than zero and revenue is generated
from the sale of the output, some models of hazardous waste recycling
involve generating revenue from inputs (acceptance of hazardous waste)
in addition to the sale of outputs.  Recyclers of hazardous wastes may
thus respond differently than traditional manufacturers to economic
forces and incentives.  An increased understanding of these unique
aspects of hazardous waste recycling can help to guide rulemaking
designed to influence this activity as practiced by firms.

Recycling of hazardous waste supports a variety of environmental goals,
including reduced generation of waste and reduced use of virgin
materials and landfill space.  Proposed revisions to EPA’s definition
of solid waste identify certain recyclable hazardous secondary material
as not being subject to regulation as hazardous waste, thus removing
some of the regulatory burdens for managing those materials.  A
potential concern with these revisions, however, is that the economic
forces that shape firm recycling behavior might differ from those that
shape manufacturing decisions.  Through a closer look at how market
forces can affect materials management for various types of recycling,
this paper aims to help EPA evaluate these proposed regulatory changes.

Despite the societal-level benefits of hazardous waste recycling, an
examination of current damage cases and public comments on EPA’s
proposed revisions of the definition of hazardous waste reveal cases
where hazardous waste recycling has not achieved the beneficial outcomes
mentioned above.  The objective of the paper is to use economic theory
to examine and attempt to explain the market forces that may contribute
to both sub-optimal and optimal outcomes from hazardous waste recycling.

From a societal point of view, an optimal amount of an economic activity
is the amount which maximizes the net benefits (private and social
benefits minus private and social costs).  At this point, the marginal
benefits of the activity (the benefits associated with the last unit of
the activity) equal the marginal costs of it (the costs associated with
providing that last unit).  Any deviation from this point leads to a
sub-optimal outcome where too little or too much of the activity is
occurring from a societal point of view.    For the case of hazardous
waste recycling, a situation of too little recycling would result in
inefficiencies, in that an increased rate of recycling (due, for
example, to EPA’s proposed changes) could realize additional net
benefits.

The focus of this paper, however, is on situations where sub-optimal
outcomes result from too much of an activity.  For hazardous waste
recycling, this situation occurs when firms are accumulating too much
waste without actually recycling it, or are operating their recycling
operation in a way that imposes excessive costs on society (such as
excess pollution or mishandling of waste).  Thus, while hazardous waste
recycling is not an inherently damaging activity, damages can result
from it if recycling is practiced in a way that generates excessive
social costs.  A move from a sub-optimal to an optimal amount of
recycling may thus involve two different sets of activities.  First
would be a reduction in waste mismanagement that result from hazardous
waste recycling, which would increase the social benefits and lower the
social costs of recycling operations (e.g., reduce leakages, spills).
Second would be cessation of activities that occur under the guise of
recycling but have little or no benefits and large costs, such as
“sham recycling.”

Using comments to EPA’s proposed rule revisions discussed above, we
define characteristics of hazardous waste recycling that are
hypothesized to contribute to sub-optimal outcomes and use economic
theory to provide information on how these characteristics might
influence different recycling models.  These characteristics are

The value of the recycled product;

Price volatility of recycling output or inputs; and

The net worth of the firm.

In this paper, we present economic models of hazardous waste recycling
to provide information on how economic theory might support or refute
the hypothesized influence of these characteristics on hazardous waste
recycling.  Utilizing economic theory, these characteristics identify
certain economic conditions that could be seen as increasing the
likelihood of waste mismanagement resulting from hazardous waste
recycling.  These conditions are

A low market value for the recycled product;

Unstable prices for the recycled product or any inputs to recycling; and

Firms with low net worth.

One similarity of the characteristics and conditions described above is
that they are at least to some degree observable or could be observable
given availability of data.  In addition to these observable
characteristics, we present additional factors that could contribute to
sub-optimal recycling.  These additional factors arise due to economic
conditions known as market failure, and differ from the above
characteristics in that they are not readily observable from firm or
market data.  These market failures are

Imperfect information; and

Externalities.

For simplicity, throughout this paper we use the term “hazardous
waste” to denote both hazardous secondary materials that are regulated
as hazardous wastes and materials that have been specifically excluded
or exempt from regulations as hazardous wastes when they are recycled.
This paper is not intended to be an exhaustive, quantitative,
waste-by-waste analysis.  Rather, the paper is intended to provide some
insights into the forces that drive firms’ hazardous waste recycling
decisions and, to support the findings, to the extent possible, with the
market data on a few selected hazardous wastes.

The remainder of this introductory section presents background
information on the major regulations that influence recycling activity
and a brief snapshot of the current state of hazardous waste recycling.
We then briefly introduce the models of recycling activity used in this
paper and discuss some variations on the types of recycling presented in
the models.

1.1.	Regulatory Framework for Hazardous Waste Recycling

Facilities engaged in hazardous waste recycling are required by federal
statutes and regulations to ensure that they protect human health and
the environment.  The primary statute governing these activities is the
Resource Conservation and Recovery Act (RCRA), which is implemented at
the federal level by EPA.  RCRA is only one of several regulatory
programs in place to protect the environment.  The RCRA regulations work
closely with other environmental statutes, such as the following:

Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA);

Hazardous Materials Transportation Uniform Safety Act (HMTUSA);

Clean Air Act (CAA);

Clean Water Act (CWA);

Emergency Planning and Community Right-to-Know Act (EPCRA);

Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA);

Marine Protection, Research, and Sanctuaries Act (MPRSA);

Occupational Safety and Health Act (OSHA);

Safe Drinking Water Act (SDWA); and

Toxic Substances Control Act (TSCA).

Though other statues and regulatory bodies may control recycling
activities, this paper focuses on RCRA because compliance with RCRA
typically entails the highest regulatory burden on recycling
activities.  Background on CERCLA is also provided because that
regulatory regime is tied closely to RCRA.

The Resource Conservation and Recovery Act (RCRA) was enacted in 1976 to
address the huge volumes of municipal and industrial solid waste
generated nationwide.  The hazardous waste management program, Subtitle
C, is intended to ensure that hazardous waste is managed safely from the
moment it is generated to the moment it is finally disposed.  Although
much of the material that is recycled is not considered hazardous waste,
this discussion focuses on requirements under RCRA Subtitle C because
these requirements are the ones most likely to impose a regulatory
burden on recycling activities.  Facilities that are involved in the
recycling process may be subject to RCRA Subtitle C if the materials
they recycle are considered to be hazardous waste.

The definition of solid waste under RCRA, which serves as the starting
point for the hazardous waste management system, reflects EPA’s effort
to minimize generation and land disposal of hazardous waste.  Materials
that are recycled are a special subset of the solid waste universe.
When recycled, some materials may qualify for an exclusion from the
definition of solid waste and either fall out of RCRA regulation or
become subject to less stringent regulatory controls.  In consultation
with the appropriate regulatory agency the generator of a recyclable
solid waste must determine if it is subject to reduced requirements or
full regulation.

A material is deemed to have been recycled if it is used, reused, or
reclaimed (§261.1(c)(7)).  These three terms have specific regulatory
definitions.  A material is reclaimed if it is processed to recover a
usable product or if it is regenerated (e.g., regeneration of spent
solvents) (§261.1(c)(4)).  A material is used or reused if it is either
employed as an ingredient in an industrial process to make a product
(e.g., distillation bottoms from one process used as feedstock in
another process) or if it is employed as an effective substitute for a
commercial product (e.g., spent pickle liquor used as a sludge
conditioner in wastewater treatment) (§261.1(c)(5)).

The RCRA regulatory regime contains provisions to reduce the regulatory
burden on recycling activities and thereby increase recycling.  Though
waste recycling and recovery are major components of RCRA’s goals,
they must be implemented consistently with proper hazardous waste
management.

As a result, RCRA contains provisions to ensure safe hazardous waste
recycling and to facilitate the management of commonly recycled waste
streams.  Reuse, recycling, and reclamation should be viewed as ways of
managing hazardous wastes which, if properly conducted, can avoid
environmental hazards, protect scarce natural resources, and reduce the
nation’s reliance on virgin materials and energy.  Promoting reuse and
recovery is certainly one of the goals of RCRA; however, this goal does
not take precedence over assuring the proper management of hazardous
waste.  EPA has tried, to the extent possible, to develop hazardous
waste management regulations that foster environmentally sound recycling
and conservation of resources while at the same time providing adequate
protection of human health and the environment.

How a material is regulated under RCRA (i.e., whether or not it is a
solid and potentially a hazardous waste) when it is recycled depends on
what type of material it is, and what type of recycling is occurring.
If the recycled material is not a solid waste, then it is not a
hazardous waste and is not subject to RCRA Subtitle C requirements.
However, if the material qualifies as a solid and hazardous waste, it is
subject to RCRA Subtitle C jurisdiction.

Many hazardous wastes can be recycled safely and effectively. To
encourage recycling while protecting human health and the environment,
EPA has tried to tailor the level of regulation to reflect the actual
hazard of the recycling activity.  In this approach to regulation,
recycling standards range from full regulation to specialized standards
to exemptions from regulation.  Handlers of hazardous waste slated for
recycling must determine, in consultation with the appropriate
regulatory agency, what type of regulation they fall under based on the
recycling activity being conducted and the type of material being
managed.  Different types of regulation for recycled hazardous wastes
are described below.

1.1.1.  	Full Regulation

Most recycled hazardous wastes are subject to full hazardous waste
regulation. This means that handlers of these recyclable materials
(i.e., persons who generate, transport, or store prior to recycling) are
subject to the same regulations as handlers who are managing hazardous
wastes prior to disposal. While management of the hazardous wastes prior
to recycling is subject to regulation, the recycling process itself is
exempt from RCRA (except for some air emissions standards). For example,
if a facility receives hazardous spent solvents from another facility
for redistillation (heating a mixture to separate it into several pure
components), the recycling units themselves are not subject to RCRA
design and operating standards for hazardous waste units. However, the
owners and operators of the recycling facility must follow all
applicable Subtitle C requirements (including the requirement to obtain
a permit) for container or tank storage areas used to store such wastes
prior to recycling.

1.1.2.  	Exemptions

Not all hazardous wastes pose the same degree of hazard when recycled.
EPA believes wastes that may be recycled in a protective manner, or that
are addressed under other environmental regulations, warrant exemptions
from RCRA Subtitle C. Consequently, handlers of these materials are not
subject to any hazardous waste regulations. These exempt recyclable
hazardous wastes are:

Industrial ethyl alcohol

Scrap metal

Waste-derived fuels from refining processes

Unrefined waste-derived fuels and oils from petroleum refineries.

1.1.3.  	Special Standards

While RCRA specifically exempts some wastes when recycled, some
recycling processes may still pose enough of a hazard to warrant some
degree of regulation. However, due to the nature of the recycling
process itself or the nature of the materials being recycled, these
processes may require a specialized set of standards. These processes
are:

Use constituting disposal

Precious metals reclamation

Spent lead-acid battery reclamation

Burning for energy recovery.

For example, persons who generate, transport, regenerate, collect, and
store spent lead-acid batteries prior to reclamation, but do not perform
the actual reclamation, are not subject to hazardous waste regulation.
EPA established those provisions to encourage the recycling of these
batteries. However, owners and operators of facilities that store spent
batteries before reclamation, other than spent batteries that are
regenerated (processed to remove contaminants and restore the product to
a useable condition), are subject to regulation in a manner similar to
hazardous waste Treatment, Storage and Disposal Facilities (TSDFs).

The Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA), or Superfund, is closely tied to RCRA: both are designed
to protect human health and the environment from the dangers of
hazardous waste.  Though these programs are similar, they do have
different regulatory focuses: RCRA regulates how wastes should be
managed to avoid potential threats to human health and the environment;
CERCLA focuses on actual releases, or substantial threats of a release
in the environment of a hazardous substance, pollutant, or contaminant,
that present an imminent and substantial threat to human health.
CERCLA, which was enacted by Congress in 1980, created a tax on the
chemical and petroleum industries and provided broad Federal authority
to respond directly to releases or threatened releases of hazardous
substances that may endanger public health or the environment.  Over a
five-year period, $1.6 billion was collected and deposited in a trust
fund for cleaning up abandoned or uncontrolled hazardous waste sites.
Recyclers are likely to be subject to CERCLA provisions for reporting
releases of hazardous chemicals, emergency preparedness and response,
and financial assurance.  In addition, should recycling activities
result in releases of hazardous materials, facilities may be liable for
cleanup under CERCLA.

1.2.	Snapshot of the Current State of Hazardous Materials Recycling

According to EPA’s 2003 Hazardous Waste Biennial Report, more than 42
million tons of wastes were managed in 2003 by 569 facilities, of which
399 (or approximately 70 percent) managed hazardous wastes onsite.  In
terms of quantity of waste managed, over 80 percent is managed onsite.
Of the total waste managed, only about 11 percent is recycled, mainly at
offsite facilities.  The rest is deposited in landfills or treated.

Exhibit 1-  SEQ Exhibit \* ARABIC \s 1  1 : Hazardous Waste Managed in
2003

	Hazardous Waste Managed

 	Onsite	Offsite	Total

Hazardous Waste Managed

   Quantity (in million tons)	34.9	7.2	42.1

   As a Percentage of Total Waste Managed	82.8%	17.2%	100%

Hazardous Waste Recycled

   Quantity (in million tons)	1.1	3.4	4.5

   As a Percentage of Total Waste Recycled	24.8%	75.2%	100%

   As a Percentage of Total Waste Managed	2.7%	8.1%	10.8%

Source: BRS 2003.

Note: Offsite recyclers may include recyclers who use recyclable
materials, either produced by themselves or outside firms, as an input
to their production process.

In terms of quantity of hazardous wastes recycled, energy recovery is a
dominant waste management practice for both onsite and offsite
recyclers.  The focus of this paper, however, is on recycling practices
other than energy recovery.

Exhibit 1-  SEQ Exhibit \* ARABIC \s 1  2 : Hazardous Waste Recycled,
2003

Recycling Type 	Hazardous Waste Recycled (million tons)

	Onsite	Offsite	Total

Energy Recovery	    0.45     (40%)	    1.01     (30%)	    1.46     (32%)

Metals Recovery	    0.20     (18%)	    0.95     (28%)	    1.15     (26%)

Fuel Blending	    0.16     (14%)	    0.76     (22%)	    0.92     (20%)

Other Recovery	    0.23     (21%)	    0.50     (15%)	    0.73     (16%)

Solvents Recovery	    0.07     (7%)	    0.19      (5%)	    0.26     (6%)

Total 	    1.12	    3.41	    4.53

Notes: Values in parenthesis indicate quantity recovered through a given
recycling method as a percentage of the total hazardous waste recycled.

Totals may not add due to rounding.

Offsite recyclers may include recyclers who use recyclable materials,
either produced by themselves or outside firms, as an input to their
production process.

Source: BRS 2003.

1.3.	Models of Hazardous Waste Recycling

As discussed in further detail below, firms face decisions about how to
handle the hazardous waste they generate, and about the mix of inputs
they use in production.  While a host of factors might affect these
decisions, this paper assumes that firms’ actions are aimed at
realizing the highest possible profit.  Despite this focus on profit
maximization, it is important to realize that this does not mean that
firms will always choose the cheapest option.  Production and waste
management decisions entail both direct and indirect costs, and firms
are assumed to weigh the full range of costs in their decision-making.
In terms of waste management, recycling and disposal are competing
options.  In addition to differences in their direct costs, the indirect
costs will vary as well, especially in relation to the resulting
liability issues.  Similar differences between direct and indirect costs
would occur in relation to the use of production inputs.  These issues
are explored in further detail in this paper.

Recycling of hazardous waste occurs both onsite at industrial
manufacturing plants and offsite at commercial waste management
facilities.  In this paper, “industrial facilities” are defined as
firms whose primary business is manufacturing of a product, and
“commercial facilities” are firms whose primary business is
management of wastes generated by industrial firms.  There are three
distinct models of hazardous waste recycling that occur at these firms;
all are included in this study:

Commercial Recycling The first model is commercial recycling, which
happens only at commercial waste management facilities.  The primary
product of these firms is recycled material.  Wastes are received for
recycling from offsite industrial sources, and may be returned to the
same generator or to another company, which may or may not be in the
same industry.

Industrial Intra-company Recycling The first type of hazardous waste
recycling at industrial firms (and the second model of recycling
considered in this paper) is called industrial intra-company recycling.
This model involves the recycling of hazardous waste by the industrial
firm itself as part of the firm’s waste management, with the objective
of reducing its waste management costs.  In some instances
intra-company recycling may involve offsite exchange of the recyclable
or recycled materials with offsite facilities owned by the same company.

Industrial Inter-Company Recycling The second type of hazardous waste
recycling at industrial firms (and the third model of recycling
considered in this paper) is industrial inter-company recycling.  This
model involves the recycling of hazardous waste from one company as an
input to another firm’s production process.

Recycling under all three of these models is driven by a host of
economic factors.  These factors influence the costs and benefits to be
gained from hazardous waste recycling and will have an effect on the
amount of recycling done by a firm.  Examples of these factors include
the value of the waste that goes into the recycling process, the value
of the recycled products, the various costs (both direct and indirect)
of managing and processing recyclable material into a recycled product,
and the costs of managing any resulting waste.  Some important
components of these costs are the transportation and transaction costs
that firms incur in their production and waste management operations.
In this paper, we discuss the influence of these economic factors on the
three models of hazardous waste recycling.

Within these three models of recycling, there are variations on how
recycling can be done, in terms of the flow of materials and the
relationship between commercial and industrial firms.  For example,
recycling can occur as either an open-loop or a closed-loop process.  In
an open-loop process, the material is recycled and made into a different
product, possibly to be used in a different industry or at least by a
different firm.  Closed-loop recycling refers to a recycling process in
which the recycled material is made into the same product again or fed
back into the same process.  A variation of closed-loop recycling is
practiced by Gage Industries.  In this recycling model, Gage owns
solvents that it rents to the automobile industry for use.  Gage then
takes back the used solvent and recycles (or reclaims) it for further
use.  Since Gage actually owns the solvent, as opposed to being a
commercial recycler that is recycling solvents owned by other firms,
they have a built-in incentive to handle it with care; any spillage or
leakage means that they will have less of the solvent to rent out.
Under another alternative to traditional recycling operations, called a
tolling arrangement, an industrial firm agrees to supply a certain
amount of waste to a commercial firm, which in turn agrees to send back
a certain amount of recycled materials for a given price.  One potential
advantage of tolling arrangements is that they protect recyclers from
sudden fluctuations in materials prices.

1.4.	Outline of the Theoretical Analysis

The theoretical analysis of the hazardous waste recycling market is
presented in section two of the paper, and is broken down into the three
models of hazardous waste recycling discussed above.  Following a
general introduction to each of the three types of recycling, the main
drivers of recycling are presented in terms of the revenue and cost
structures of the participating firms.  For the cost structure of the
firms, the discussion is divided into sections on the direct and
indirect costs.  Section two of the paper then concludes with a
discussion of various types of market failures, i.e., situations where
competitive markets do not function properly leading to undesirable
outcomes from the perspective of both the affected firms and society as
a whole.  Section three then summarizes the major findings from the
paper and presents concluding remarks.

As part of the development of the theoretical models of hazardous waste
recycling, a literature review was conducted to determine the current
state of information on hazardous waste recycling in both the economic
and non-economic literature.  Insights from this literature are included
in this paper, and a summary of the literature review is included in
Appendix I.  Finally, Appendix II presents an empirical analysis of five
selected hazardous materials being recycled and links the empirical
analysis with the theoretical analysis presented earlier.  The five
materials analyzed are lead-acid batteries, brass dust, spent pickle
liquor, solvents, and drums.2.	Theoretical Analysis

This section of the paper develops a theoretical model of the hazardous
waste recycling market.  First, three models of hazardous waste
recycling are presented and discussed within the context of
profit-maximizing decisions made by commercial and industrial firms.
For each of the three models, we discuss the recycling process’s
revenue and cost structure, including both direct and indirect costs.
This discussion is followed by a formal presentation of a model for each
type of recycling.  Lastly, we discuss different kinds of market
failure.  This discussion includes a theoretical explanation for why the
hazardous waste recycling market may produce sub-optimal outcomes, with
marginal costs that exceed the activity’s marginal benefits.  These
sub-optimal outcomes can result either from the acceptance of an excess
of waste (not all of which is recycled) or from mismanagement during the
recycling process.

2.1.	Commercial Hazardous Waste Recycling

Commercial recyclers are firms whose primary business is accepting
hazardous waste, recycling it, and selling the output to outside
entities.  A diagram of the recycling process for commercial recyclers
is shown in Exhibit 2-1.  The output of this process is a final product,
which is then sold to an outside entity, and waste which is usually
either hazardous or contains hazardous constituents.  This waste must be
managed and disposed of by the commercial firm.  In the following
sections, the revenue and cost structures of commercial recyclers are
discussed in further detail.

Exhibit 2-  SEQ Exhibit \* ARABIC \s 1  1 : Diagram of Commercial
Recycling

2.1.1.	Revenue Structure of Commercial Recyclers

The primary revenue for commercial firms is from the sale of their
recycled product.  Commercial firms may also generate revenue by
charging a fee for accepting hazardous waste.  Depending on market
conditions, commercial firms will either buy hazardous waste or receive
a fee to accept it.  This acceptance fee’s relative importance in the
firm’s overall revenues primarily depends on the price the commercial
firm receives for its recycled product.  Other factors that may affect
the importance of the acceptance fee include the strength and stability
of the market.  Depending on these factors, the acceptance fee may play
a negligible role in the firm’s revenue structure, and the firm might
even be willing to pay to accept recyclable material.  If, however, the
firm cannot charge a sufficiently high price for the recycled material,
or it faces a weak or unstable market for its recycled product, the
acceptance fee may be an important component of the firm’s overall
revenue.  This kind of scenario could encourage firms to continually
accept waste when they cannot realistically process or sell it.  The
influence of the different components of the commercial recycler’s
revenue on the firm’s operation will be discussed in further detail
below.

In cases where generators pay commercial recyclers to accept hazardous
waste, landfill disposal fees are one factor that influences the
acceptance fees received by commercial recyclers.  Since commercial
recyclers are competing with landfills, and with each other, to obtain
waste from generators, the acceptance fees would need to be relatively
similar to landfill disposal fees to attract waste from industrial
firms.  Cost data collected by the Environmental Technology Council
indicate that landfill tipping fees for treatment and landfilling of
hazardous waste were, on average, $140 per ton for treated bulk and
soil, and between $100 and $200 per 55-gallon drum for treated drummed
wastes from 2002 to 2004.  Thus, we would expect that the acceptance
fees ranged, on average, between $100 and $200 per ton or 55-gallon drum
in the same period. (See Appendix II for more information.)

2.1.2.	Direct Costs of Commercial Recyclers

The direct costs faced by commercial recyclers are the costs they face
for recycling the hazardous waste they receive from waste generators.
These direct costs can be broken down into capital and operating costs.
Capital costs represent investments in equipment and facilities needed
for recycling of hazardous waste and managing the resulting wastes.
Operating costs cover labor, utilities, materials and the waste
treatment and disposal process.  These costs can vary according to the
characteristics of the hazardous waste being recycled.  Recycling some
waste materials might require a complex and capital-intensive process.
Recycling of other waste materials might have low capital requirements,
but have high operating costs in terms of the labor, utilities or
materials needed to manage and process them.  Firms would be expected to
weigh direct costs against expected revenues when determining whether to
enter the market for a particular recycled material.

Another component of direct costs that might influence the operation of
commercial firms is transportation costs.  These costs would most likely
occur for commercial recycling firms in the sale of their recycled
output, and also in the management and disposal of waste from the
recycling process.  Transportation costs could also be incurred to
obtain of hazardous wastes as an input to their recycling process,
although these costs are generally borne by the hazardous waste
generator.

Additional factors that influence the direct costs of recycling at
commercial firms are the size of a commercial firm and the amount of
hazardous waste it can recycle.  As with most industries, recycling is
subject to economies of scale, meaning that as the amount of recycled
material the firm is producing increases, the cost of recycling
decreases on a per-unit basis.  A general expectation would be that,
other things being equal, an increase in firm size or the amount of
hazardous material recycled would lower the per-unit cost of recycling
hazardous materials (McLaren and Yu, 1997).  For commercial recyclers,
attempting to achieve economies of scale could be an incentive for them
to expand their operations.  A real-world example is found in the
solvents recycling market, where Safety-Kleen, the largest US commercial
solvents recycler, has increased economies of scale by expanding its
network of solvent collection centers. (See Appendix II for more
information.)

2.1.3.	Indirect Costs of Commercial Recyclers

In addition to the direct costs discussed above, commercial recyclers
incur indirect costs for functions like administration and reporting.
These would include the costs of obtaining a RCRA permit and keeping it
current.  For smaller firms, these costs could be large enough to serve
as a barrier to entry into the commercial recycling market.  Along with
other administrative costs associated with operating a commercial
recycling business, these indirect costs would need to be considered by
commercial firms in their decisions on whether to enter or exit the
market, and on their level of production.

The largest and most complex category of indirect costs is liability
costs associated with the handling of hazardous waste.  In the case of
an accident or environmental damage caused by the mishandling of waste,
commercial firms would be liable for these damages.  40 CFR 264.147
requires owners and operators to “have and maintain liability coverage
for sudden accidental occurrences in the amount of at least $1 million
per occurrence with an annual aggregate of at least $2 million,
exclusive of legal defense costs.”  They are also required to provide
financial assurance for facility closure (40 CFR 264.143) and
post-closure care (40 CFR 264.143).  It is expected that the firm would
take these various costs into consideration in their decision to enter
into the recycling market, or to remain in it if there were a change in
regulatory requirements that would substantially increase these costs.
Since firms are liable for damages up to their net worth, it would be
expected that firms with a greater net worth would have more incentive
to operate in a careful matter and guard against potential liabilities
than smaller firms that could escape large liability risks by declaring
bankruptcy (Alberini and Frost, 1999).

A commercial firm’s treatment of liability issues may influence the
amount of business it can get.  If hazardous waste is mishandled by a
commercial firm, the generator of that waste can be held liable for the
damages (Rosenbaum, 1990).  Many waste generators that are looking to
transact with a commercial recycler consider the potential liability
risk of a commercial firm before sending waste to them.  Commercial
firms with a history of RCRA violations or a history of health and
safety accidents might need to charge a lower acceptance fee in order to
obtain business than firms with stronger reputations.  Waste generators
that are concerned only about costs might be willing to send waste to
commercial firms that have a greater liability risk but have lower fees,
whereas waste generators that are more careful or cautious in relation
to liability issues might be willing to send waste only to commercial
firms with a low liability risk or that have insured against their
risks.

Transaction costs are another economic factor that can influence the
indirect costs of recycling for commercial firms.  Transaction costs are
the costs that a firm incurs as a result of dealing with other economic
agents.  Since commercial firms do not generate the waste they use for
recycling, they face transaction costs in obtaining hazardous waste and
also for the sale of their recycled output.  These costs again can be
viewed as part of the firm’s operating costs, and would be considered
by the firm in making its operating decisions.   The effect of
transaction costs would be to raise the cost of recycling for commercial
firms in comparison to industrial firms that might use their own waste
as inputs for a recycling process.

In the next section, we graphically illustrate commercial recyclers’
behavior using cost curves.  Cost curves are a standard economic tool
for analyzing and graphically illustrating firm’s behavior.  We use
the same tool later in the paper to analyze and illustrate industrial
recyclers.

2.1.4.	Model of Commercial Recyclers

This section incorporates the discussion of the costs and revenues of
commercial recyclers presented above into a formal model for recycling
by commercial facilities. Commercial recyclers’ primary product is
recycled material derived from the hazardous waste they receive from
other firms.  In this model, commercial recyclers receive a fee (R) for
accepting hazardous waste (Qhw) from waste generators.  The commercial
recycler then processes this material and sells the recycled product
(Qr) at the prevailing market price (Pr).  In the production of the
recycled materials, the commercial recycler incurs various direct and
indirect costs (C).  Since commercial recyclers have two potential
sources of revenue, their total revenue (TR) is the sum of the revenue
they receive for accepting hazardous waste and the revenue they receive
for selling the recycled product (TR = (R*Qhw )+ (Pr*Qr)).  In
determining their output decisions, profit-maximizing firms will look at
the revenue from producing one more unit of output, which is their
marginal revenue (MR), relative to the cost of producing that unit,
which is their marginal cost (MC).

Commercial recyclers are assumed to be “price takers” with respect
to their outputs, meaning that they sell their output at the price
determined in the market by the intersection of demand and the aggregate
supply of all of the producers of recycled hazardous materials.  The
actions of the individual commercial recycling firm do not influence
this market price, and the firm must use this price to determine its
appropriate level of output.  The commercial recyclers can also be
assumed to be “fee takers,” in that they are competing with other
offsite disposal options and other recyclers for getting hazardous waste
from generators.

It is assumed that the actions of the commercial recycling firm do not
affect landfill disposal fees, and it again must set its acceptance fee
based on the prevailing market forces regarding hazardous waste
disposal.  Since the commercial recycler is both a price taker and a fee
taker, the firm’s marginal revenue is equal to the price of recycled
materials it produces plus the acceptance fee for the waste it receives
(MR = Pr+R).

Under the standard microeconomic model of a competitive market, a firm
will enter the market as long as the market price is high enough to
cover its average total costs (ATC=TC/Qhw).  For commercial recyclers,
however, it is not only the price of the recycled product that affects
their entry/exit decision.  Rather, commercial recyclers will enter the
recycling market as long as the price of recycled materials plus the fee
they receive for accepting hazardous waste is greater than the cost of
producing the recycled good.  They will then accept hazardous waste and
produce recycled materials as long as their ATC is less than the price
of recycled goods plus the acceptance fee (ATC<(R+Pr)).

The costs faced by the commercial recycler to produce different amounts
of recycled goods can be shown graphically.  Plotting the firm’s
average cost for the production of different units of recycled materials
will yield the firm’s average total (ATC) cost curve.  Another
important curve that can be shown is the firm’s marginal cost (MC)
curve, which represents the cost of the last unit produced, or the
change in total cost divided by the change in quantity for each
additional unit.  This MC curve is upward sloping, and the portion of
the MC curve that is above the ATC curve represents the firm’s supply
curve for recycled materials.  A profit-maximizing commercial recycler
will produce recycled materials up to the point where its marginal costs
of production equals its marginal revenue (MC=MR).  This will be the
profit-maximizing output for the commercial recycler since any
additional unit would cost them more than the revenue they would be able
to receive for it.  This situation is illustrated below in Exhibit 2-2.

Exhibit 2-  SEQ Exhibit \* ARABIC \s 1  2 : Model of Commercial
Recyclers

As shown in Exhibit 2-2, the successful operation of the commercial
recycling firm depends on its ability to produce output at a cost no
greater than the combined price of the recycled materials it produces
plus the acceptance fee for receiving the hazardous waste.  Exhibit 2-2
depicts a situation, for instance, where the price of the recycled
materials (Pr) is below the firm’s cost curves, and the firm is
dependent on the acceptance fee to operate a profitable business.
Fluctuations in the firm’s revenue stream or its costs can thus affect
its operation.  If the price of recycled material goes down, for
example, due to decreases in the price of virgin materials, the marginal
revenue of the firm could fall below the firm’s ATC curve.  This
results in a situation where the firm would not be able to recover its
cost by accepting and recycling hazardous waste.  In the long run, this
would typically mean that the firm would shut down and exit the market.

2.2.	Industrial Intra-company Recycling

The primary business of industrial firms is manufacturing a product and
recycling hazardous wastes is a secondary activity.  Industrial firms
can be involved in hazardous waste recycling in two different ways,
resulting in two different models.  The first of these models, termed
intra-company recycling, involves hazardous waste recycling by firms as
part of their waste management strategy.  A diagram of how industrial
intra-company recycling works is shown in Exhibit 2-3.  The firm
receives raw materials, which it puts through a manufacturing process.
The output of that process is the firm’s product, and hazardous waste
is a byproduct.  The firm has three main alternatives for managing its
hazardous waste:  ship it off for disposal, send it to a commercial
recycler, or recycle the waste themselves (at an onsite or offsite
location).  In intra-company recycling, the company utilizes hazardous
waste generated during production and runs it through a recycling
process.  The result is a recycled product that the firm can either feed
back into its production process (thus substituting for the use of
virgin materials), or sell to other firms.  A byproduct of this
recycling process is waste for disposal.

Exhibit 2-  SEQ Exhibit \* ARABIC \s 1  3 : Diagram of Industrial
Intra-company Recycling

2.2.1.	Revenue Structure of Industrial Intra-company Recycling

The primary source of income for industrial firms is from the sale of
the products they manufacture.  Though recycling its hazardous waste may
result in revenues for the firm, this is viewed as a secondary source of
income and would not significantly influence the production decisions of
the firm.  Since intra-company recycling enters into the firm’s
process in its waste management decisions, the revenues generated from
this process can be viewed as something that serves to offset waste
management costs.  As shown above in the diagram, the firm could also
choose to use the recycled product it generates in its own production
process.  The choice of whether to sell the recycled product or use it
in its own production process would be assumed to be based on
profit-maximizing objectives, with the recycled product going to the use
that generated the largest amount of cost savings for the firm.

2.2.2.	Direct Costs of Industrial Intra-company Recycling

The categories of direct costs faced by intra-company recyclers are
similar to those discussed above for commercial recyclers.  The main
categories of direct costs are capital costs (equipment and facilities)
and operating costs (labor, utilities, materials, waste treatment and
disposal, etc.).  Capital costs must be incurred to participate in
recycling, while operating costs can vary with the amount of production
or changes to the recycling process.  Since intra-company recycling is
one of the firm’s waste management choices, the firm would be expected
to weigh the direct costs of various waste management options when
determining whether to engage in intra-company recycling.

The main difference between intra-company recycling and the other waste
management choices of the firm is that recycling is undertaken by the
firm itself, while other waste management options involve the firm
shipping the waste to another entity.  This difference influences the
composition of the direct costs faced by the firm for waste management.
Waste management options undertaken by another entity would involve
primarily operating costs, such as transportation of waste and payment
of disposal fees or possible acceptance fees to commercial recyclers.
By comparison, recycling would likely entail significant capital costs,
but then might involve lower operating costs than offsite waste
management options.  The large capital requirements could serve as a
barrier against firms engaging in intra-company recycling (Technology
Resource Inc., 1988).

Transportation costs could influence waste management choices at
industrial firms, and they may vary greatly depending on the location of
the firm relative to landfills and commercial recyclers that could
potentially accept the industrial firm’s waste (Alberini and
Bartholomew, 1999).  For firms that had convenient disposal or offsite
recycling choices located nearby, transportation costs would likely not
be a significant factor in determining the firm’s waste management
choices.  On the other hand, industrial firms far from disposal sites or
commercial facilities might face substantial transportation costs that
could serve as an incentive for them to set up an onsite recycling
operation.

As with commercial firms, economies of scale would also be expected to
play an important role in the decisions of industrial intra-company
recyclers.  Economies of scale can influence waste management decision
since larger firms that produce more hazardous waste may face lower
per-unit costs for recycling than smaller firms (Technical Resource,
Inc., 1988; McLaren and Yu, 1997).  We would therefore expect to find a
higher level of intra-company recycling at larger firms, with smaller
firms substituting away from recycling to other waste management
options.  Other things equal, an increase in firm size or the amount of
hazardous material recycled would lower the per-unit cost of recycling
hazardous materials and thus would be expected to increase the amount of
recycling.  Evidence that a firm’s size influences its waste
management choices is seen in the steel industry, where smaller steel
mills may not be generating enough spent pickle liquor to make it
cost-efficient for them to recycle it onsite, given that regenerating
plants require high start-up costs and are designed to run continuously.
(For more information, see Appendix II.)

Another cost factor that might influence the waste management decisions
of industrial firms is the cost associated with producing heterogeneous
goods (Harrington et al. 1999; Bailey et al. 2002).  Since the primary
business of these firms does not involve producing goods from recycled
hazardous material (rather, hazardous material is generated as a
byproduct), recycling hazardous waste can be viewed as a secondary line
of business.  In other words, beyond the direct and indirect costs
associated with recycling hazardous waste onsite, the industrial firm
faces additional costs in terms of diverting their scarce resources
(e.g., labor force or managerial attention) from their primary
operation.  This diversion of resources involves opportunity costs,
since those resources could be devoted to the production of the firm’s
primary product instead of to the recycling operation (Technical
Resource, Inc., 1988).  This diversion of resources would raise the
firm’s cost for the option of recycling onsite, and we would expect
that firms would consider this cost when deciding whether or not to
engage in intra-company recycling.  In the steel industry, for example,
finished steel products and regenerated pickle liquor are not
distributed to the same consumers, so a steel company with a
regeneration plant would likely need to develop two supply channels.
This need to divert resources from its main operation (i.e., making
steel) may discourage a steel company from operating a regeneration
plant onsite.  A steel company may find it more profitable to
concentrate on making steel, while outsourcing K062-regeneration. (See
Appendix II for more information.)

2.2.3.	Indirect Costs of Intra-company Recycling

As with commercial recyclers, industrial intra-company recyclers also
face indirect costs that influence their recycling decisions.  In terms
of how these indirect costs influence recycling by these firms, it is
important to understand how indirect costs influence waste management
choices more generally.  Similarly to commercial recyclers, the largest
area of indirect costs are liability issues.  A complicating factor of
liability costs is that, unlike other categories of costs associated
with waste management, liability costs are long-term and uncertain
(Alberini and Frost, 1999).  It is thought that industrial firms will
factor potential liability costs into their waste management choices,
and invest in proper waste management up to the point where they reduce
their potential liability costs to a level they find acceptable.  The
greater the net worth of the firm, the more it potentially has to lose
from liabilities associated with improper handling of its waste
(Alberini and Frost, 1999).  The firm thus has more incentive to engage
in careful waste management and to protect itself against potential
liabilities.

Secondary liability issues are another area in which liability
influences industrial firms.  As discussed above, an industrial firm
could be held accountable for mishandling of its waste by another entity
such as a commercial recycler (Rosenbaum, 1990).  Industrial firms that
have a high level of concern about potential liabilities would likely
consider these secondary liability issues in their waste management
choices.  These secondary liability issues could increase the attractive
of onsite waste management choices such as intra-company recycling.  If
the industrial firm engages in onsite waste management, it reduces its
exposure to secondary liabilities associated with other entities
handling its hazardous waste.

Additional indirect costs to be considered for the firm’s waste
management options include transaction costs of dealing with other
economic agents, such as disposal site or commercial facilities.
Transaction costs would raise the costs to the firm of waste management
involving another entity, and could serve as an incentive to engage in
recycling.  By recycling, industrial firms would reduce the transaction
costs associated with waste management, but they could incur additional
transaction costs if they sold their recycled product to outside
entities instead of reusing it in their own production process.

2.2.4.	Model of Intra-Company Recycling

In this section, a formal model is developed for industrial
intra-company recycling.  A representative industrial firm is in the
business of producing good Qp, and a byproduct of this production
process is hazardous waste material Qhw.  It has three options for
managing Qhw, each with a different associated cost:

Dispose of the hazardous waste in a landfill and pay disposal fee (D),
which includes the direct costs of management as well as indirect
(regulatory, liability, etc.) costs.

Pay a fee (R) to, or accept a fee from, commercial recyclers to recycle
Qhw.

Recycle Qhw itself, which can be done at some cost (C).  The recycled
product (Qr) can then either be used as an input in the production of Qp
or be sold at the prevailing market price Pr. The price the firm receive
for selling the recycled product offsets its total recycling costs (TC =
(C*Qhw)–(Pr*Qr)).

Under the assumption that the firm’s waste management decisions are
driven by profit-maximizing motives, the firm will choose the option
that minimizes its waste management costs, or the minimum of D, R and
C–Pr.  If there is no existing stable market for the recycled good, Pr
can be assumed to be zero and the firm will choose among D, R or C.
Even with a zero value for the recycled good, the firm may still choose
to recycle if C is the least costly option due to the decreased indirect
costs (i.e. regulatory and liability costs) involved in disposing of
hazardous waste (D).  In the long run, it is assumed that the industrial
firm can switch freely between these waste management options since if
it did not possess the infrastructure needed to recycle onsite, it could
invest in new capital or equipment to do so.  In the short run, it is
assumed that the industrial firm could choose between the different
offsite waste management options (disposal or sending to commercial
recycler) and would base this decision primarily on the relative costs
of the different offsite disposal options.

In examining the firm’s decision of whether or not to recycle
hazardous waste itself, Exhibit 2-4 shows per-unit costs for two
different waste management options by the firm for its hazardous waste.
First, the per-unit cost of external waste management methods (such as
shipping waste to a landfill or a commercial recycler) is shown by the
line CE.  To simplify the graph, these two external waste management
options are shown by this one line since, for reasons discussed above,
an industrial firm’s cost for each of these options would be similar.
The cost an industrial firm faces for external waste management is
constant for the firm and determined by the market.  The set of cost
curves (ATC and MC) represent the firm’s cost for managing its
hazardous waste internally through intra-company recycling.  Two
different factors work to offset the firm’s recycling costs.  First
the recycled product would either be sold, resulting in revenues for the
firm, or used as an input in the firm’s production, resulting in
reduced input costs.  Second, engaging in intra-company recycling would
enable the firm to avoid costs associated with disposal or shipping
waste to a commercial recycler.  For the situation in Exhibit 2-4, the
firm would choose to engage external waste management for low quantities
of waste (less than QE) since that is the least cost option.  For
quantities of waste above QE, the firm would choose to engage in
intra-company recycling since the per-unit costs are lower than the
costs of the waste management options involving disposal or shipping to
commercial recyclers.  The exhibit demonstrates the importance of
economies of scale for recycling, since the firm needs to produce more
than a certain quantity of waste in order for industrial intra-company
recycling to be the most cost-effective choice.

Exhibit 2-  SEQ Exhibit \* ARABIC \s 1  4 : Model of Industrial
Intra-company Recyclers

2.3.	Industrial Inter-company Recycling

The second kind of recycling at industrial firms is known as industrial
inter-company recycling.  In this model, firms use recycled materials,
either produced by themselves or outside firms, as an input to their
production process.  The recycled materials are used as a cost-saving
substitute for virgin materials.  A diagram of the recycling process as
practiced in industrial inter-company recycling is shown in Exhibit 2-5.
 The industrial firm engages in a manufacturing process, and faces a
choice of inputs to that process.  The firm can either use virgin or
recycled materials for production.  To use recycled materials, the firm
would first accept recyclable hazardous waste from another firm.  The
firm would then either use this material directly or put it through a
recycling process to produce the needed inputs for its primary
production process.  The outputs of this recycling process are recycled
materials (for use in production), and waste (which must be disposed).
The recycled materials would then be used in a manufacturing process,
which generates the firm’s product.  This manufacturing process
results in additional waste for disposal.

Exhibit 2-  SEQ Exhibit \* ARABIC \s 1  5 : Industrial, Inter-company
Recycling

2.3.1.	Revenue Structure for Industrial Inter-company Recyclers

As discussed above, the primary revenue source for industrial firms is
their product.  Inter-company recycling enters into the firm’s
decision-making process in the determination of the mix of inputs to use
for its manufacturing process.  Inter-company recycling is thus not
something that would generate revenue for the firm, rather it is
something that would influence its production costs.  The choice of
whether or not to engage in inter-company recycling is best viewed as
how it would influence the potential costs faced by the firm for its
manufacturing process.

2.3.2.	Direct Costs for Industrial Inter-company Recycling

The direct costs for industrial inter-company recycling are primarily
capital and operating costs as defined above for the previous two
models.  Industrial firms choose among various production inputs based
on their relative costs, assuming profit-maximizing motives by the firm.
 If the firm needed to set up its own recycling operation (as opposed to
obtaining recycled material from another firm) inter-company recycling
might involve significant capital costs for the firm.  In relation to
operating costs, using virgin materials would generally be more
expensive than using recycled materials, resulting in lower total
operating costs for using recycled materials.  The decision of an
industrial firm of whether to engage in inter-company recycling involves
this tradeoff between capital and operating costs and the differences in
cost between using virgin and recycled materials.  If the cost savings
from using recycled rather than virgin materials are small, the firm
might not find it cost-effective to invest in equipment needed to engage
in inter-company recycling.  On the other hand, a large divergence
between the prices of virgin and recycled inputs would increase the
attractiveness of inter-company recycling to the firm.

As discussed with the previous two models, there are additional factors
that influence the direct costs of inter-company recycling.  One of
these factors is transportation costs.  The industrial firm would incur
transportation costs in acquiring its production inputs, and this could
affect its choice among different mixes of inputs.  If there were a
significant difference in the transportation costs the firm would incur
between obtaining virgin materials and recyclable material for use in
production, this could be a factor that plays into the firm’s input
choices.  Firms engaging in inter-company recycling would also face
increased transportation costs for disposal of the waste from the
recycling process.  Transportation costs could serve as a disincentive
for engaging in inter-company recycling if they were sufficiently high
to reduce the cost savings involved in inter-company recycling.

The size of a firm is an important factor in the cost-effectiveness of
engaging in inter-company recycling.  We expect that economies of scale
would be important for firms in their production input decisions.  For
example, given the significant capital expenditures involved in
inter-company recycling, it is likely that these expenditures are more
cost-effective for a larger firm that is using a greater quantity of
recycled materials as inputs than for a smaller firm.  As with
industrial intra-company recycling, a general expectation is that the
amount of inter-company recycling would increase with the size of the
firm.

Lastly, as with intra-company recyclers, the cost of producing
heterogeneous goods might also be a factor that affects the industrial
firm’s choice of production inputs (Harrington et al. 1999; Bailey et
al. 2002).  Similarly to industrial firms engaging in intra-company
recycling, inter-company recycling usually involves adding a secondary
production process to the firm’s operation.  The cost savings that an
industrial firm might achieve from engaging in inter-company recycling
would need to be balanced by the costs that would be incurred from the
diversion of resources and management attention away from the firm’s
primary production to this secondary line of production.  In making
profit-maximizing decisions regarding the choice of production inputs,
the firm would be expected to weigh these costs, to the extent that they
could be known, against the savings that would be realized by recycling
onsite to provide production inputs.

2.3.3.	Indirect Costs of Inter-company Recycling

Similarly to the other types of recycling, there are also indirect costs
associated with industrial inter-company recycling.  To the extent that
firms could know and predict these costs, they would be factored into
the firm’s decisions regarding inputs to production.  As with the
other two models of recycling, the main indirect cost of inter-company
recycling involves liability issues.  The industrial firm would face
potential liabilities from accepting hazardous waste, storing it, and
recycling it onsite.  Additional liabilities could result from the
management of the waste from the recycling process.  As discussed above,
there is a positive correlation between the net worth of a firm and the
amount it stands to lose due to liability issues.  Insurance is one
possible means by which the firm could protect itself against
liabilities, but insurance would not be expected to cover acts of
negligence.  The amount of care an industrial firm would place in its
recycling process would likely be positively correlated with the size of
the firm, since larger firms face greater potential liabilities from
their recycling operations (Alberini and Frost, 1999).  These liability
issues would raise the cost of recycling, and could discourage firms
from engaging in inter-company recycling if they viewed the liability
costs as being prohibitively high.

Transaction costs are an additional factor of indirect costs for
inter-company recycling.  The influence of transaction costs on
inter-company recycling could be expected to be less than for the other
two recycling models since inter-company firms must already deal with
other economic agents to obtain their production inputs.  Transaction
costs could come into play for inter-company recyclers, however, given
that switching to using recyclable materials as inputs instead of virgin
materials would involve the transaction costs of dealing with additional
firms.  Inter-company recyclers might also face transaction costs from
dealing with an outside agent for disposing of waste generated during
the recycling process.  The amount of these transaction costs would
likely be related to the degree to which waste from the recycling
process can be managed along with the waste from the firm’s production
process.  If the waste from the recycling process involves transacting
with a separate firm, these additional transaction costs could prove to
be a significant factor in the firm’s choice of whether to engage in
inter-company recycling.

2.3.4.  	Model of Industrial Inter-company Recycling

This section presents a formal model of industrial inter-company
recycling in relation to the firm’s production decisions for its
primary manufacturing process.  Inter-company recyclers are in the
business of producing a primary product Q, which is sold on the market
at the prevailing price P.  The firm’s production costs are modeled
below in Exhibit 2-6.  The firm faces a variety of decisions in the
production of Q, one of which is the mix of inputs used in production.
The firm has a choice of either using virgin materials for the
production of Q or replacing virgin materials with recycled materials.
Depending on the material and the production process, recycled materials
could be obtained from a recycler and used directly, or recyclable
materials could be obtained from a generator and put through a recycling
process by the firm for further use in production.  The firm’s choice
of using virgin or recycled materials as inputs to production will
depend on the relative costs of each kind of input.  The exhibit below
depicts a situation where the cost of using virgin materials is higher
than the cost of using recycled materials.  The production process using
virgin materials is represented by the average total cost curve (ATCv)
and the marginal cost curve (MCv).  When using virgin materials as
inputs, the firm will produce Qv units of output, which are sold at the
market price P.

For the situation depicted in the exhibit, the firm could reduce its
costs by using recycled materials as inputs.  These materials would
either be obtained from a generator and used directly in production or
put through a recycling process by the firm (with waste generated as a
byproduct) and then used in production of Q.  Since this is a lower-cost
option for the firm, using recycled materials would shift its average
total cost and marginal cost curves down to ATCr and MCr.  At these new
lower cost curves, the firm would be able to produce a greater quantity
of their product, represented by Qr, which can be sold at the market
price P.

Exhibit 2-  SEQ Exhibit \* ARABIC \s 1  6 : Model of Inter-company
Recycling

2.4.	Market Failures

According to economic principles, the market for recycled materials from
hazardous waste would, ideally, result in the production of the socially
optimal amount of recycled materials.  This amount would be reached
according to the intersection of what producers are willing to supply to
the market and what consumers are demanding.  The suppliers of recycled
materials (commercial and industrial firms) adjust their production of
recycled materials based on price signals received from the market.
Problems arise, however, when markets do not operate properly and fail
to provide these appropriate signals to producers and consumers.  For
recycling, the result is production of an amount of recycled material
that differs from what the market would indicate as socially optimal,
with either too much or too little recycled materials being produced
(van den Berg and Janssen, 2005).  There are several different ways in
which market failure could enter into the hazardous waste recycling
market.   This section introduces some of these issues and illustrates
how they could result in sub-optimal outcomes.

2.4.1.	Imperfect Information

One source of market failure in hazardous waste recycling occurs when
firms have imperfect information on either the costs or revenues
associated with producing recycled materials from hazardous waste.  On
the cost side, commercial and industrial recyclers may have imperfect
information on to the costs of producing recycled materials.  Imperfect
information could arise from a variety of factors.  One example is that
firms that accept waste from an outside source for recycling may be
misinformed as to the composition or characteristics of the waste they
receive.  If, for example, the waste it receives requires more
processing than it was expecting, the recycling costs of the firm would
be higher (McLaren and Yu, 1997).  Costs could also be higher than
expected if the firm did not properly educate itself on the processes
involved in recycling hazardous waste in a safe and compliant manner
before entering into the business.  The complex regulatory framework
associated with hazardous waste recycling could also play a role in
firms having imperfect information on their potential costs for
recycling hazardous waste.  On the revenue side, commercial and
industrial recyclers may have imperfect information on the demand for
their products.  If the demand for their final product is more elastic
(i.e., more price sensitive) than the recyclers have expected, for
example due to the availability of substitutes, any attempt to pass the
costs onto consumers will result in lower total revenues than they have
anticipated.

Imperfect information would influence firms differently in the short and
long run.  Starting with the case of commercial recyclers, imperfect
information would prevent the firm from correctly interpreting the full
costs associated with recycling hazardous material in a proper manner.
If the commercial recyclers underestimated the costs associated with
recycling, they would erroneously enter the market and would have an
incentive to produce too much recycled materials even when the market
should have given them different signals.  This situation is shown in
Exhibit 2-7 below.  The original market conditions are shown where Qr
units of recycled materials are produced by the commercial recycler by
operating on their perceived cost curves (ATC1 and MC1), which would
fall below the actual costs of producing the recycled materials in a
responsible manner (ATC2 and MC2).  If, for reasons such as increasing
regulation, the commercial recycler were forced to operate on the cost
curves that reflect the true costs of recycling in a responsible manner
(ATC2 and MC2), they would make different production decisions in the
short and long run than if they were operating on their perceived cost
curves (ATC1 and MC1).  In relation to long–run decisions, the firm
would not have entered the market if it had acted on the basis of the
true cost curves (ATC2 and MC2), since there is no point at which their
average total costs (ATC) are below their marginal revenue for producing
recycled materials (ATC2>MR=P).

Since the firm cannot leave the industry in the short run, operating at
the higher set of cost curves will force the firm to either shut down or
operate at a loss.  As discussed above, the choice among these
activities would be determined by the firm’s ability to cover its
variable costs in the short run.  If producing recycled materials still
generates revenue above the firm’s average variable costs, it will
continue to operate in the short run to reduce losses, and then close
down in the long run.  The firm may have an incentive in the short run
to reduce costs in whatever way it can to lower its cost curves and thus
its financial losses.  One strategy for reducing these losses could be
to continue to accept hazardous materials and the revenue stream
associated with that activity, while cutting costs by engaging in
improper waste management.  The incentives for these activities would be
particularly high if the fee the firm receives for accepting hazardous
waste is high compared to the price it receives for the sale of its
output.  The firm may view mismanagement of waste as attractive if it
believes it can avoid the true costs involved with properly handling or
disposing of the materials.

Exhibit 2-  SEQ Exhibit \* ARABIC \s 1  7 : Imperfect Information for
Commercial Recyclers

It is important to note that imperfect information not only influences
the firms that are in the hazardous waste recycling market, but it also
influences which firms choose to enter the market in the first place.
Misperceptions about the costs, or the potential damages, of hazardous
waste recycling would create a bias as to the type of firms that enter
the market.  This would result in more firms entering the market that
are misinformed about the true costs involved with hazardous waste
recycling.  This phenomenon, known as adverse selection, is a commonly
identified source of market failure (Boardman et al. 1996).

In addition to firms that enter the market with erroneous information
about the costs of recycling, there could also be a segment of the
market characterized by the firms that entered intending to ensure their
costs are low by ignoring adequate standards of care and potential
liability costs.  The size of the fee for accepting waste in relation to
the revenue for selling recycled output would likely be an important
factor in prevalence of this activity.  If the acceptance fee is the
dominant revenue source for commercial recyclers, they could have more
incentive to focus on accepting hazardous waste and less incentive to
focus on actually producing recycled output in a compliant manner.  To
the extent that these firms ignore liability costs and safe production
practices, they would be able to set their acceptance fees lower than
firms operating in a compliant manner, resulting in more hazardous waste
flowing to these firms and more potential mismanagement of wastes.

Imperfect information can also influence industrial firms in their
decisions to recycle hazardous waste onsite.  A similar situation as
shown in Exhibit 2-7 above could occur with industrial recyclers (either
intra-company or inter-company) if their perceived costs for recycling
hazardous waste were lower than the true costs.  The industrial firms,
however, face a different situation than commercial firms due to being
able to substitute away from producing recycled materials onsite if the
costs become prohibitively high for them to do so.  The industrial firms
may thus have less incentive to mismanage their waste, and may also be
less inclined to do so due to the liability issues discussed above.
Industrial recyclers also do not have incentives to store or stockpile
their waste since they do not receive any revenue from accepting waste.
It would thus be expected that imperfect information on the costs of
recycling hazardous waste would encourage industrial intra-company
recyclers to substitute away from onsite recycling to other waste
management options, and would encourage industrial inter-company
recyclers to substitute away from onsite recycling to increased use of
virgin materials in production.

Even if recyclers, either commercial or industrial, were well informed
about the true costs of running the recycling business before entering
the market, they may find themselves in the situations depicted above if
they had imperfect information about the price elasticity of demand for
their final product, and thus their ability to cope with increases in
production costs.  Price elasticity of demand indicates how responsive
demand for a product is to a change in its own price.  The more
responsive demand is (i.e., more elastic), the greater will be a change
in demand in response to a given change in the price.  Goods with close
substitutes and low transaction costs associated with switching between
substitutes have a more elastic demand.  When faced with an increase in
production costs, recyclers may decide to pass some or all the
incremental costs onto their customers.  The effect that this action
will have on their total revenues will depend on the price elasticity of
demand for their product.  Exhibit 2-8 illustrates this point for
commercial recyclers.  The original market conditions are depicted where
the commercial recycler produces Q units of recycled goods at the market
price of P.  If the commercial recycler perceives the market demand
curve to be relatively inelastic (DP), he will expect to pass a large
share of any increase in his production costs onto his consumers and
still operate profitably.  The increase in the production costs are
illustrated by the upward shift in the commercial recycler’s cost
curves (MC’ and ATC’) and by the upward shift in the market supply
curve (S’).  The true demand (DT), however, is fairly elastic.  The
increase in the price of recycled goods will lead to a larger decrease
in the quantity demanded than the commercial recycler has anticipated.
With the market price of P’, the commercial recycler will continue to
operation in the short run only if he can cover his variable costs,
otherwise he will shut down.   In the long run, we would expect the
commercial recycler to exit the market (since P’< ATC’).

If faced with increasing operating costs and elastic demand for their
final product, profit-maximizing industrial recyclers would shift to a
different waste management option.  Industrial intra-company recyclers
may substitute away from recycling to other waste management options,
while industrial inter-company recyclers may substitute away from
recycling to increased use of virgin materials in the production
(assuming that the forces driving the costs of recycling hazardous
wastes have smaller or no effect on the use of virgin materials).

Exhibit 2-  SEQ Exhibit \* ARABIC \s 1  8 : Uncertainty in the Demand
for Recycled Products

2.4.2.	Externalities

Externalities are common sources of market failure, which occur when the
welfare of one agent (such as a firm or household) is affected by some
other agent without permission or compensation.  Externalities can
either be positive, where the action adds to the agent’s welfare, or
negative, where the action detracts from it.  Negative externalities
often exist for pollution and other environmentally degrading activities
undertaken by individuals and firms, and they occur when the costs of
the environmentally degrading action to society is not reflected in the
private costs faced by the agents undertaking the activity (Kolstad,
2000).

The potential influence of negative externalities on the hazardous waste
recycling market is illustrated in Exhibit 2-9 below.  The graph on the
left represents a typical firm (either industrial or commercial), and
the graph on the right shows the market supply and demand curves for
recycled materials.  The market supply curve represents the summation of
the supply curves of all the individual firms that supply recycled
materials.  As discussed above, the supply curves of these firms are
determined by their marginal costs for producing various units of
recycled materials.  Marginal costs are based on the direct and indirect
costs of the firm.  The production costs of a firm that considers only
its private costs are shown as the lower set of cost curves, ATCP and
MCP.  Alternately, the production costs of a firm that considers social
as well as private costs are shown as the higher set of cost curves on
the graph, ATCS and MCS.  Two different market supply curves result from
the choices of firms.  The lower market supply curve, denoted as SP,
represents the supply of hazardous materials as determined by the
private costs of the individual firms.  The higher market supply curve,
denoted as SS, represents the market supply when firms also consider the
social costs of their business.  As discussed earlier, the firm is
considered to be a price taker, and equates its marginal cost with its
marginal revenue, or the price of its output.  The prevailing market
price for recycled materials, and thus the resulting quantity produced,
is determined from the intersection of the market demand curve (DM) and
the market supply curves.

A negative externality occurs in the hazardous waste recycling market
when the social costs associated with producing the recycled materials
(e.g. environmental damage, human health risks) are not being accounted
for by the firms in their production decisions (Gottinger, 1991a).
Since firms are operating in a competitive environment, considering only
their private costs is often the only rational profit-maximizing
response for firms.  Any move by a firm that increases its costs
relative to the competition will put them at a disadvantage, so firms
cannot be expected to consider social costs if they are not forced to do
so.  For the firms, considering only their private costs means operating
on the lower set of cost curves on the graph to the left.  The result of
firms not accounting for the social costs when determining the level of
output is that a larger amount of recycled material is produced than is
socially optimal in terms of the damage resulting from recycling
activities.  If firms consider only their private costs, then QP units
of recycled materials are produced at a market price of PP with external
costs of the firm being shifted to society.

If firms instead accounted for the social costs of their production
decisions, the result would be a reduction in the amount of recycled
materials that are supplied by firms, and also a higher price for them
(since they would be produced in a more compliant manner).  This new
price and quantity of recycled materials would be set where the new
social cost supply curve (SS) intersects the market demand curve.  The
result would be that QS units of recycled hazardous materials would be
supplied at a price of PS.  Exhibit 2-9 illustrates the situation where
the firm will exit the market at the new price PS since the market price
will not cover its recycling costs (PS<ATCS).  The difference between
the two price amounts (PS – PP) represents the per-unit amount of the
negative externality that is imposed on society by recyclers of
hazardous waste failing to account for the external social costs of
their activities when making their production decisions.

Exhibit 2-  SEQ Exhibit \* ARABIC \s 1  9 : Negative Externalities in
the Hazardous Waste Recycling Market

3.	Discussion and Conclusion

Increased understanding of the economic forces that influence hazardous
waste recycling can contribute to our knowledge of how firms will factor
recycling into their production and waste management decisions.  These
issues were explored through economic models of hazardous waste
recycling as practiced by commercial, industrial intra-company, and
industrial inter-company recyclers.  This paper also suggested key
characteristics that were hypothesized to influence hazardous waste
recycling behavior.  We divided these characteristics into those that
are potentially observable from data on a firm or the market for
recycled products, and those that are by nature unobservable.  In
conclusion, we revisit these characteristics and summarize what has been
learned about these characteristics through the economic modeling of
different kinds of hazardous waste recycling.

3.1.	Discussion of Observable Firm and Market Characteristics

In this section, we discuss how characteristics potentially observable
through firm and market data could influence firm recycling behavior.
These characteristics are the value of the recycled product, the
stability of prices and the net worth of the firm.

Value of the recycled product:  The value of the recycled product is an
important determinant of a firm’s revenue structure, and is
hypothesized to influence hazardous waste recycling behavior.  For all
three models of hazardous waste recycling, we would expect a recycling
market with a high value product to have a higher likelihood of optimal
recycling outcomes than a recycling market with a low-value product.
With a high value recycled product, firms are likely to exercise greater
care in handling recyclable hazardous waste, since spillage or leakage
of waste represents a loss of input material and thus results in lower
revenues from selling the final product.  In cases where recycling firms
receive an acceptance fee for taking in recyclable hazardous waste, such
as the case with some commercial recyclers, the acceptance fee becomes a
much more prevalent factor in the firm’s revenue structure when the
recycled product has a low value. In such cases, firms may have an
incentive to accept a greater quantity of recyclable waste than they
could properly manage. For intra-industrial firms, the value of the
product would serve as a strong incentive for proper management of the
recycled material.  A similar argument holds for inter-company recyclers
that are using a recycled product or hazardous waste generated from an
outside source as an input to their production.  If the recycled product
has a high value, we would expect that the industrial inter-company
recyclers would exercise greater care in their recycling process and the
handling of the recycled product.

Stability of prices:  Stability of prices in both the inputs and outputs
of hazardous waste recycling is another characteristic that is
hypothesized to influence hazardous waste recycling as practiced by the
three different models.  When prices are stable, firms can more easily
adjust their production in response to the price signals they receive
from the market.  They are thus less subject to sudden upsets to their
revenues or costs which could force them to operate at a short or
long-term loss.  For firms that are recycling to produce a marketable
output (i.e., commercial and industrial intra-company firms), stable
prices for the recycled good help the firm to know that it can expect a
return from recycling that justifies it entering the market and can
recover the investment costs.  Commercial firms, for example, use
tolling agreements to protect themselves from price instability.  For
industrial inter-company firms (and in some cases intra-company firms),
stable prices help the firm to judge whether the expense of setting up a
recycling operation to generate a product for use as a substitute input
in the production of their final output is justified.

Net worth of the firm:  Liability issues are the major contributor to
indirect costs of commercial and industrial firms.  Liability issues
affect firms differently due to many factors.  One of these factors, the
net worth of the firm, is hypothesized to be an important indicator of
whether hazardous waste recycling would be expected to produce optimal
or sub-optimal outcomes.  For commercial and both kinds of industrial
firms, liability issues would be expected to have greater prominence for
firms that have a higher net worth and have an established history in
the industry.  If a firm has the potential to take a large loss due to
liability issues, it would be expected to protect itself against this
risk through careful and compliant practices and possibly through
insuring against liability risks.  Apart from protection against
liability risks, commercial firms may operate in a careful manner in
order to attract business.  Due to secondary liability issues,
industrial firms may examine the liability history of commercial firms
and prefer to send waste to those that have a good record of complying
with the environmental and safety regulations.  Firms that have a higher
net worth have more to lose from liability issues and thus have a
greater incentive to invest in careful waste management practices.
These firms thus would be expected to be more likely to practice
recycling in an environmentally safe manner and also to insure against
possible liability risks.  While many factors contribute to optimal
hazardous waste recycling outcomes, having a high net worth is one
potential indicator of this result for firms.

3.2.  	Empirical Evidence for Observable Firm and Market Characteristics

In order to provide further information and support of the ideas
expressed in this theoretical analysis, we conducted an in-depth
empirical analysis of five selected, commonly recycled hazardous wastes.
 The original goal of the empirical analysis was to test the various
hypotheses that are presented in the theoretical analysis.  However,
limitations on the availability and quality of data prevented us from
conducting these empirical tests.  The empirical analysis of the five
hazardous wastes was instead used to provide information on the
characteristics of markets for these materials that increase our
understanding of how market forces shape behavior for the different
recycling models laid out in this paper.  In this section, we use
information on the characteristics of these markets to show how it
supports or refutes the conclusions drawn above on the potentially
observable characteristics of firms.  Further detail on the empirical
analysis of the five hazardous wastes is provided in Appendix II.

The analysis in this section was done using information on recycling
markets for five selected hazardous waste materials, four of which are
regulated by EPA as hazardous waste.  These materials were selected by
EPA to illustrate market conditions for different hazardous waste
recycling models.  Although all of these materials have significant
rates of recycling, they are neither representative of all hazardous
wastes nor should the recyclers of these wastes be considered
representative of the recycling models with which they are associated.
Information on environmental damage cases associated with recycling
activities involving the selected hazardous waste materials was
collected as part of a separate EPA report titled “An Assessment of
Environmental Problems Associated with Recycling of Hazardous Secondary
Materials” (EPA, 2006).

In Exhibit 3-1 below, the five hazardous wastes are characterized by
recycling model.  Three of the materials are characterized by a
commercial recycling model, and two each have characteristics of the two
different industrial recycling models.  Since spent pickle liquor occurs
both at commercial and industrial firms, this material is listed under
two different recycling models.  We then use information from the
empirical analysis of the five hazardous waste materials to provide
further evidence on the characteristics that we hypothesize have an
influence on hazardous waste recycling behavior.

Exhibit 3-  SEQ Exhibit \* ARABIC \s 1  1 : Type of Recycling for Five
Selected Hazardous Wastes

Type of Recycler	Material

Commercial recycler	Spent Pickle Liquor

Spent Solvents

Used Empty Drums

Industrial intra-company recycler	Spent Pickle Liquor

Industrial inter-company recycler	Used Lead-Acid Batteries

Brass Dust

3.2.1.  Value of the Recycled Product

The value of the recycled product is hypothesized to influence hazardous
waste recycling behavior, with a high-value product being one potential
indicator of a recycling market which produces optimal outcomes.  In
contrast, a low-value product is a characteristic that could possibly
increase the likelihood of sham recycling, where firms engage in
recycling primarily to receive the acceptance fees for waste and do not
have a genuine interest in recycling the waste.  Characteristics of the
recycling markets for the five selected hazardous waste materials are
presented below in Exhibit 3-2, including a proxy measure for the
acceptance fee for the waste and the market values for the virgin and/or
recycled product.  A comparison of the proxy acceptance fee and the
value of the product provides an indication of markets for which the
value of the product could be low as compared to the acceptance fee a
recycler would receive for accepting waste.  In the used lead-acid
battery and brass dust recycling markets, the value of the final
recycled product is likely significantly higher than the acceptance
fees.  Thus, the recycled products in these markets could be considered
high value, and the acceptance fees for waste would not be a dominant
revenue source for the recyclers in these markets.

For spent solvents, however, comparison of the proxy acceptance fee and
the product value suggests that spent solvents could possibly be
considered a low-value product, with recyclers generating their primary
revenue from the acceptance fees.  While this difference in acceptance
fees and product value could be an indicator of sub-optimal recycling
outcomes from solvents, other empirical evidence refutes the notion that
recycled solvents are a low-value product.  One way to determine if a
product has value is if it displaces another valuable product.  Based on
communications with solvent recyclers, there is a legitimate market for
recycled solvents (such as auto repair shops), which is an indication of
the value of the product, given that recycled solvents are displacing
virgin solvents for some uses.  Additionally, there could be other
reasons why a comparison of the acceptance fee and the product value
would not be an accurate representation of a recycled product having a
high or low value.  If, for example, the solvent recycling process had
high costs and several drums of spent solvent were needed to produce one
drum of regenerated solvent, the recycler would need to charge a high
acceptance fee just to cover its costs.  The divergence between the
acceptance fee and the value of the recycled product is then just an
indicator of high recycling costs and not of a low-value recycled
product.  Additionally, it should be noted that the proxy acceptance fee
shown for solvents may overestimate the real acceptance rate due to the
fact that spent solvents have an alternative use to recycling (use as
substitute fuels).  In times of high oil prices, spent solvents which
can be used as substitute fuels would likely have a significantly lower
acceptance fee than the one presented in the exhibit, and recyclers may
even be willing to pay to accept them.

Exhibit 3-  SEQ Exhibit \* ARABIC \s 1  2 : Product Value and
Acceptance Fees

Material	Used Lead-Acid Batteries	Brass Dust	Spent Pickle Liquor	Spent
Solvents	Used Empty Drums

Proxy Acceptance Fee (2002)1	$160/ton	$160/ton	$114/drum	$114/drum	NA

Recycled Product	Lead	Zinc	Pickle Liquor	Regenerated Solvents
Reconditioned Drums

Dominant Consumers	Battery Manufacturers	Zinc Mills	Steel Mills
Auto-repair shops, dry cleaners	Manufacturers of low to mid value goods

Product Value (2002)	$953/ton2	$845/ton3	NA	$35/drum4	$805

Note: All values are in constant dollars. NA – information not
available.

1) Based on the Environmental Technology Council survey data. The proxy
acceptance fee is a landfill disposal fee.

2) Market price for lead from the US Geological Survey.

3) Market price for zinc from the US Geological Survey.

4) Estimated price for regenerated solvents, calculated as the weighted
average of estimated prices for trichloroethylene, methyl ethyl ketone
and perchloroethylene. The weighted price of virgin solvents is
$54/drum.

5) Estimated price for a 55-gallon steel drum based on industry
communication.

3.2.2.  Stability of Prices

The stability of prices is hypothesized to influence recycling behavior,
with stable prices for recycled products being one possible indicator of
markets that produce optimal recycling outcomes.  With volatile prices,
recyclers may face times of reduced profits, or even times where they
must operate at a loss.  As discussed above, this could serve as an
incentive for various kinds of waste mismanagement designed to help
firms cut recycling costs.  Various factors contribute to price
volatility.  We would expect that materials predominantly traded on the
global market (such as metals) would have higher volatility as a result
of changes in exchange rates, trade policies and regulations, and
country specific economic conditions.

The 2006 EPA study shows that out of the damage cases found involving
recyclers of solvents, batteries and drums, the most common cause of
damage was mismanagement of recyclables and/or residuals.  We have found
evidence that volatile prices may have provided an incentive to
recyclers of lead-acid batteries and some solvents to engage in waste
mismanagement.

We used historical price information (where available) and producer
price indices for selected products to construct volatility indices.
The results are presented in Exhibit 3-3.  Findings suggest that prices
for lead, zinc and solvents are more volatile compared to general
measures of volatility, where general measures are defined as average
volatility of a basket of related goods (metal and metal products for
lead and zinc, and chemicals and allied products for solvents).  We
would thus expect price volatility to be a significant causal factor for
damaging behavior for these markets.  With prices being relatively
unstable, we could conclude that it is likely that some firms may enter
these markets in order to make a quick profit in times when there is an
upward spike in product prices.

Exhibit 3-  SEQ Exhibit \* ARABIC \s 1  3 : Price Volatility – Mean
and Standard Deviation

Materials	1970-2002	1980-2002	1996 - 2002

Lead1	14% (13%)	14% (14%)	5% (3%)

Refined lead	NA	10% (8%)	6% (5%)

	Zinc1	15% (12%)	15% (10%)	14% (10%)

Refined zinc, slab, dust	NA	13% (8%)	11% (7%)

	Barrels, drums, and pails	NA	3% (3%)	1% (1%)

	Basic organic chemicals	NA	5% (4%)	3% (4%)

Trichloroethylene2	NA	NA	2% (0.5%)

Methyl Ethyl Ketone2	NA	NA	9% (7%)

Perchloroethylene2	NA	NA	7% (7%)

	Metals and metal products	5% (6%)	3% (3%)	2% (1%)

Chemicals and allied products	5% (7%)	3% (4%)	1% (2%)

All commodities 	5% (5%)	3% (3%)	2% (2%)

1) Volatility index based on market prices available from the US
Geological Survey.

2) Volatility index based on market prices from The Innovation Group,
available in “Chemical Profiles” at   HYPERLINK
"http://www.the-innovation-"  http://www.the-innovation-
group.com/welcome.htm.

Notes:

1) Volatility index is defined as mean of the absolute values of the
annual percent change in price.

2) Unless otherwise noted, volatility index constructed using data on
the producer price index from the US Bureau of Labor Statistics.
Available at   HYPERLINK "http://www.bls.gov/ppi/"
http://www.bls.gov/ppi/ .

3) Time intervals were selected to make the data from different data
sources comparable.  For example, price information for
trichloroethylene was only available for the period 1996-2002.

4) NA – not available.

Recycling facilities, however, can mitigate, to some extent, the effects
from volatile prices.  For the lead-acid battery and spent pickle liquor
markets, tolling agreements are common, which to some extent protect the
recyclers from fluctuations in the price of the final product.  The
agreements also are likely to have a clause allowing the recycler to
adjust the price if the cost of electricity and/or fuel increases, thus
providing some protection from increases in production costs.  Some
hazardous wastes also may have multiple commercial uses which serve as
an additional buffer from price volatility of the primary product.
Firms that handle wastes with multiple uses have less incentive to
stockpile waste since the waste can be diverted to another use if
decreases in the price for the recycled product make recycling
unprofitable.  As shown in Exhibit 3-4, we found evidence of multiple
uses, mitigating the effects of price volatility in four of the
recycling markets.  As discussed above, spent solvents may be used as
secondary fuels instead of recycled in periods of high oil prices.  For
emptied drums, scrapping used drums for metal is an alternative use to
reconditioning them.  If the price of reconditioned drums falls,
recyclers can sell them for scrap as opposed to stockpiling them until
the market recovers.  A similar situation exists for spent pickle
liquor, which can be used in wastewater treatment if low demand for
steel causes a drop in its price.  Although lead-acid batteries are
currently the only significant use for lead, tolling agreements serve as
protection for battery recyclers.

Exhibit 3-  SEQ Exhibit \* ARABIC \s 1  4 : Multiple Use

Material	Used Lead-Acid Batteries	Brass Dust	Spent Pickle Liquor	Spent
Solvents	Used Empty Drums

Is there other commercial use?	Yes, although very small	NA	Yes, water
treatments plants	Yes, fuel substitution	Yes, scrap steel

3.2.3.  	Net Worth of the Firm

The net worth of the firm was hypothesized to be an indicator of optimal
recycling outcomes, with low net worth firms having less incentive to
engage in careful waste management.  Although we were unable to collect
data on this issue in the empirical analysis, we did find some evidence
supporting this hypothesis in our communications with industries in the
recycling markets for the five selected materials.  In the steel
industry, for example, secondary liability issues were mentioned as a
concern by firms in terms of sending spent pickle liquor to commercial
firms for regeneration.  Representatives at two large steel firms
mitigated the potential secondary liability risk by periodically doing
site visits to the commercial recyclers to ensure that their wastes are
being handled in a compliant manner.  Since, due to the value and the
volume of the products sold, these steel mills are likely to have a
higher net worth than the commercial facilities recycling their spent
pickle liquor, they are concerned about secondary liability. Namely,
should a commercial recycler be required to pay for damage it caused by
mishandling spent pickle liquor, it will be able to pay only the amount
up to its net worth (i.e., the amount that can be generated by selling
off its assets).  However, if the damage is significantly higher than
what the commercial recycler is able to pay, then it is possible that
the steel mills may be required to cover the difference.

3.3.  	Discussion of Unobservable Firm and Market Characteristics

In addition to those characteristics of firms and recycling markets that
would be potentially observable, this paper also discussed kinds of
market failure that could contribute to sub-optimal hazardous waste
recycling outcomes.  While the sources of market failure discussed in
the paper are important, they do not necessarily correlate directly to
observable characteristics of the firm or market.

Imperfect information:  One source of market failure in hazardous waste
recycling by commercial and both kinds of industrial firms is imperfect
information.  If firms lack complete and accurate information about the
market for hazardous waste recycling, they may make different decisions
regarding their entry into the market or level of production than if
they had better information.  This can lead to the phenomenon of adverse
selection, where more firms that are misinformed on the market choose to
enter it than firms that are well informed.  Firms can have imperfect
information on both the costs and revenues of hazardous waste recycling.
 On the cost side, firms can be misinformed about the true costs of
operating a recycling operation in a safe and compliant manner.  This
could result in firms that operate in a less safe or less compliant
manner or that have to exit the market, since the true costs of
recycling would not allow the firm to operate at a profit.  On the
revenue side, commercial firms and industrial intra-company recyclers
may have incomplete information about the market prices of recycled
goods due to lack of market data or unstable prices.  Imperfect
information on revenues could thus also contribute to sub-optimal
recycling outcomes since it could serve as an incentive for firms to try
and cut recycling costs by operating in a less safe manner or as an
incentive for them to have to exit the market.

Externalities:  Another common source of market failure identified in
the paper is externalities, which result when firms only take
responsibility for their private costs, and do not account for social
costs resulting from their actions.  These social costs are treated as
external to the firm and are thus passed on to society.  Pollution
resulting from hazardous waste recycling constitutes an externality if
the firm does not pay for the damages caused by the pollution.  The
decision by a firm to pass some of the costs of its actions onto society
rather than internalizing them is a potential cause of sub-optimal
outcomes for hazardous waste recycling.  This kind of externalities
could either result from ignorance on the part of firms of the external
damage they are causing, or from deliberate attempts on the part of
firms to lower their costs.  The result of externalities in the
hazardous waste recycling market is a larger amount of recycled
materials being produced at a lower price than would result if firms
internalized the full costs of their recycling operations.

3.4.  	Conclusion

Recycling of hazardous waste offers many potential benefits to firms and
more generally to society through reducing waste and the use of virgin
materials and landfill space.  This paper used economic theory to
examine cases when these benefits fail to be realized and hazardous
waste recycling results in costs to society that outweigh its benefits.
Economic modeling of recycling as practiced by three different types of
firms provided information on how hazardous waste recycling can result
in sub-optimal outcomes, and it also enabled us to identify potentially
observable characteristics of firms and markets that are possible
indicators of hazardous waste recycling that could generate sub-optimal
outcomes.  Different kinds of market failures were also discussed in
terms of how they can contribute to environmentally destructive
behavior.  Identifying these sources of market failure can point to
potential solutions for the different issues.

Appendix I – Literature Review

Initial searches and reviews of the literature found relatively few
articles of interest with a focus on the economics of hazardous waste
recycling from the perspective of firm decision-making.  While there are
many studies in the economics literature relating to recycling, these
almost exclusively relate to recycling of non-hazardous waste by
households.  Existing literature on hazardous waste recycling is mostly
focused on economic analysis of different policies to improve hazardous
waste management.  While these articles provided some useful information
about the general market forces that may influence hazardous waste
recycling, literature in areas outside economics proved to have the most
specific information about the economics of hazardous waste recycling
from a firm-level perspective.

Although most of the literature that discussed firm-level recycling
decisions was focused on specific industries, a small number of studies
discussed these issues in more general terms.  One study, for instance,
examined the barriers against the recycling of hazardous waste in Canada
(Technology Resource, Inc., 1988).  Through a survey of firms, the study
found that economic issues were the most common barriers against
hazardous waste recycling.  The economic factors that presented the
biggest challenges to recycling were the existence of lower-cost
disposal options, the high investment risk for recycling with low
payback potential, and small or nonexistent markets for recycled
materials.  The study also pointed to a number of factors suggesting
that firm size may be a crucial determinant of hazardous waste recycling
activity, since larger firms have potential advantages in terms of being
able to absorb new capital costs and in being able to process a larger
volume of hazardous waste (i.e., economies of scale).  The study noted
that market incentives would be needed to encourage a higher rate of
hazardous waste recycling.  Incentives should serve to decrease the
uncertainty around hazardous waste recycling and increase the rate at
which firms receive revenues for their recycled output.  Additional
roles for incentives would be to provide information to firms to aid in
the reduction of capital expenditures, and to increase the demand and
marketability of recycled materials.  While this study provided a
detailed analysis of the economics of hazardous waste recycling, the age
of the study and its focus on Canada may limit its relevance to the
current state of hazardous waste recycling in the United States.

Another group of studies used economic modeling to characterize the
waste management decisions of a representative industrial firm.  A
common finding of these studies was that, while other factors may play
into waste management decisions, profit maximization is the primary
framework from which firms make waste management decisions (Gottinger,
1991b; McLaren and Yu, 1997; Alberini and Frost, 1999; Dijkgraaf and
Vollebergh, 2003).  These studies modeled the waste management decisions
of firms as a choice of the least-cost option among different disposal
choices.  The costs of the various disposal options were modeled as a
function of the characteristics of the waste, the firm, the disposal
option, and the existing regulatory framework.  In making decisions
regarding hazardous waste management, studies generally found that firms
tend to balance the short-term, certain costs associated with waste
management (e.g., transportation, disposal) with the long-term uncertain
costs such as liability (Gottinger, 1991b; Alberini and Bartholomew,
1999).

In understanding the firm-level factors that influence hazardous waste
management decisions, it is useful to think of the different categories
of costs that play into these decisions.  As suggested by Fleet (1993),
these costs can be broken down into four main categories, which are
thought to vary widely by firm, depending on firm size and aspects of
the regulatory climate.  These categories include direct costs, which
are the main costs associated with production and waste management.  A
second category is indirect costs, which include regulatory compliance