For decades now, recycling has been among the popular “green habits” to adopt as part of daily life. Many cities require that residents separate their trash so plastic bottles, glass bottles, and paper products can all be sent off to be broken down and repurposed as raw material to be used in production. Recycling centers collect waste for a nominal fee. Companies loudly advertise their products are made from “100% recyclable materials”. Common to many of these trends are policies intended to directly encourage recycling, whether it is through subsidies or the threat of fines when individuals do not comply. Missing from the popular and academic conversation surrounding recycling is how free markets may help or inhibit more recycling and increased recycling efficiency.
We argue individuals will find it in their self-interest to recycle, conditional on the institutions permitting such behavior. Recycling tends to be costly relative to the value it creates such that any additional costs (e.g., transaction costs) can inhibit the development of markets in recycling. However, more economic freedom can lower transaction and other costs, ultimately leading to a higher expected value in recycling. Economic freedom, as used here, refers to institutions such as strong property rights, limited government regulation, and freedom to trade. Higher levels of economic freedom, then, can promote higher levels of recycling relative to a situation where economic freedom is more restricted.
Many researchers have studied the relationship between institutions, such as democratic governance and economic freedom, and environmental issues. Clulow and Reiner [1
], for example, examine how democracy affects energy transition, finding that democracy has a significant effect on low-carbon energy sources. Similarly, earlier work from Graddy [2
] shows that increases in the level of democracy in a country can have significant positive effects on pollution reduction. Other research, more directly related to this paper, has assessed the relationship between economic freedom and environmental issues. Mahmood et al. [3
] find evidence suggesting economic freedom can create an environment that encourages R&D activities that enhance energy-saving technologies and have a positive impact on the environment. Rapsikevicius et al. [4
] present evidence from European countries showing mixed results of the effect economic freedom has on environmental performance and suggest a way to think about the optimal level of economic performance. Other tangentially related work has focused on the effect economic freedom can have on tourism [5
Much of the research on the economics of recycling has focused on the efficiency of recycling and consumer behavior in recycling. For instance, Rapsikevicius et al. [6
] propose a way of using blockchain technology in recycling programs to enhance coordination and efficiency in plastics recycling. Several other papers examine how entrepreneurship impacts innovation in recycling [7
]; consumer perceptions of recycling [8
]; consumer intentions to recycle at the end of a product’s life using survey results and case studies [9
]; and consumer recycling behavior in different settings [11
]. These works, particularly those related to entrepreneurship, are conceptually linked to our focus on economic freedom. Countries with higher levels of economic freedom create the institutional conditions necessary to incentivize wealth-enhancing entrepreneurship [13
]. However, existing research has not linked economic freedom to recycling specifically. Our intention is to bridge the gap between these two subjects by examining how institutions, specifically economic freedom, can affect recycling across countries using both panel data on 34 countries from 2000 to 2019 and two case studies.
The regression analysis using our panel data assesses the relationship between economic freedom and recycling rates while accounting for a variety of relevant controls and any year or country-specific heterogeneity to isolate our relationship of interest. Our regression estimates suggest there is a strong positive relationship between economic freedom and recycling rates, independent of policy effects. While those results do not illuminate the exact mechanism for this relationship, we explore how the strength of private industry and state intervention can affect recycling efficiency using two case studies. Not only do the case studies aid in understanding the mechanism by which economic freedom may positively affect recycling rates, they also complement the regression results in uncovering potential causal effects.
Our case studies examine recycling programs and industries in the Republic of Korea and Taiwan. These cases are useful for our purposes because they represent two examples where economic freedom moves in opposite directions, at least with respect to the management of recycling. In the Republic of Korea, the government implemented subsidies for recycling while leaving decision-making up to private industry for how to manage recycling. In Taiwan, the government nationalized the recycling industry. Both countries experienced increases in their recycling rates under drastically different policies. However, the institutional differences give reasons to believe that cost-efficiency across the two countries varies. the Republic of Korea’s policies left recycling in the hands of private industry, allowing the incentives for cost minimization to guide decision making. In contrast, the nationalized recycling industry in Taiwan weakened the incentives for cost efficiency by leaving decision making up to government bureaucrats.
The empirical results and case studies presented in this paper contribute to the literature on free market environmentalism. Our evidence suggests that, despite the fact that our of measure economic freedom does not directly target recycling, it creates an environment conducive to more recycling by allowing individuals to exploit gains from trade. This also suggests that enhancing economic freedom along margins more directly related to recycling could have similar effects. The estimated relationship between economic freedom and recycling rates is also stronger than that between environmental policy stringency and recycling rates, suggesting further that economic freedom may play a more important role. If policymakers want to encourage more recycling, they can potentially make more progress toward this goal without resorting to costly subsidies, recycling requirements, or a nationalized industry.
The rest of the paper proceeds as follows. Section 2
lays out the economics of recycling and provides some theoretical justifications for why economic freedom can positively affect recycling. Section 3
presents our methodology including the data description and empirical strategy. Then, in Section 4
, we present our regression results, estimating the relationship between economic freedom and recycling rates in OECD countries from 2000 to 2019. Additionally, Section 4
details changes in recycling policies in the Republic of Korea and Taiwan as case studies to better understand the relationship between economic freedom and recycling policy. Section 5
discusses our results and potential avenues for future research.
2. Theoretical Background
The generation, disposal, and treatment of waste are all issues faced by developed and developing countries alike. As countries become richer, people consume more, leading to more waste generation. This trend shows no signs of stopping in the future; as countries become more developed, more waste is projected to be created [14
]. Something must be done with that waste, and much of it is commonly relegated to landfills. Landfills and incineration facilities have been found to generate a variety of negative externalities, such as air pollution, greenhouse gas emissions, and water contamination, among many others [15
]. These concerns have led to efforts to encourage recycling and reduce the volume of waste making its way to landfills. Although recycling programs have been commonly implemented through various government policies, such as mandatory recycling or subsidies, recycling can also emerge through private incentives.
Suppose we have an individual who we will call Maren. Maren consumes some good until its use value eventually reaches USD 0 (It is likely that Maren values the previously used good at some negative price, meaning she would be willing to pay someone to take the item. This item is then an economic bad, which is the opposite of an economic good. An economic good is something that individuals place a positive value on having a higher quantity. An economic bad, then, is something that individuals place a positive value on having a lower quantity. Waste is an economic bad. For simplicity, we assume the item’s value is USD 0 in our example). At that point, from Maren’s perspective, the good turns into waste and will be disposed of. However, the fact that Maren now values the good at USD 0 does not imply there is no other individual who places a value above USD 0 on what is now considered waste. If there is another individual, we will call him Lee, who values Maren’s waste at USD 5 because he can convert it into a usable material, then there is the possibility for gains from trade between Lee and Maren. Lee is willing to pay up to USD 5 for the waste and Maren is willing to accept any price above USD 0. Maren and Lee can exchange at some price between USD 0.01 and USD 5 and both parties will be made better off. The differences in valuations of what Maren considers waste lead to opportunities for trade, creating the incentives for individuals to recycle. In a zero transaction costs world, Maren would be able to sell any of her waste to someone such as Lee, who is willing to pay for it (attaches some positive value to her waste). However, in a world with positive transaction costs, the costs of exchanging may prevent these transactions from occurring, as the ability for Lee to profitably find and collect these items may be costlier than the profit he would make from using, or recycling, them.
The higher a person such as Lee values the good, the more likely these trades will occur. However, the higher the transaction costs, the less likely these trades will occur. The magnitude of these transaction costs will be a function of the institutions under which these individuals exchange in. Under institutions with poorly defined property rights and significantly costly barriers to entrepreneurial action, transactions costs will be higher, leading to less transactions like the one between Maren and Lee. Countries with these institutions tend to be less economically free, as defined by the Economic Freedom Index [26
], than countries with well-defined property rights and few barriers to entrepreneurial action. In contrast, more economically free countries will tend to have stronger property rights and lower transaction costs, making it more likely for private exchange in recycling to emerge, ceteris paribus
Even in a country with high economic freedom and significantly low transaction costs, there will always be some waste that cannot be profitably bought and used in a production process by an entrepreneur or consumed by someone with a positive consumer surplus. In such cases, negative externalities associated with waste disposal will still exist. Panel (a) in Figure 1
portrays this externality in the market for landfill services with a marginal social cost curve
having a higher price for a given quantity of landfill services relative to the marginal private cost curve
. The societal optimal quantity of landfill services
is less than the market equilibrium quantity
. There are several possible remedies.
The first-best solution would be to better define property rights to internalize the externality, as recognized by Coase [27
]. However, there are high transaction costs associated with defining property rights over the relevant margins to internalize the externality, such as the externalities methane emissions have on air quality and changing the environment. The next best solution would be to institute a Pigouvian Tax on landfill services to the point where marginal private cost equals marginal social cost, thereby leading to an equilibrium quantity of
(Numerous studies have analyzed the effects taxes have on waste [28
]. For a discussion and economic analysis of the optimal waste tax, see Kinnaman [31
]). As the price of landfill services increases with the tax, individuals will consume less landfill services. Although this leads to less waste being thrown into landfills, that waste may be placed in less desirable places through illegal waste-dumping activity. The unintended consequence to rising prices in landfill services is individuals engaging more in throwing their waste on public lands or even other people’s property, as this type of disposal, although illegal, is a substitute for paying waste service fees (Multiple studies find that increasing waste taxes lead to increased illegal waste dumping [32
]. Perhaps the most thorough investigation of illegal waste dumping, or “fly-tipping” as it is called in England, is Liu et al. [37
An alternative solution to a tax, and a common policy in many countries, is to subsidize recycling services. Recycling is a substitute for landfill services. A subsidy lowers the relative price of recycling to landfill services, leading to more waste being recycled and less thrown into landfills (For recent studies comparing waste taxation and recycling subsidy regimes, see Helm et al. [40
] and Hua et al. [41
]). The effect a recycling subsidy has on the market for landfills is shown in Panel (b) of Figure 1
. The demand, or marginal benefit, for landfill services falls because the price of recycling has fallen with the subsidy. The new equilibrium is at
(Although the socially optimal quantity from the original graph in Panel (a) is reached, this is not the new socially optimal quantity with the subsidy included). Even though there still exists dead-weight loss in this market because
, the quantity is the same as that reached at equilibrium
, the intersection of
. Through the subsidy for recycling, the original optimal quantity of landfill services in the market without the subsidy is reached (For a similar analysis on the economics of recycling subsidies, see [42
] (pp. 486–487)).
There are multiple ways a government could subsidize recycling services. On one end of the spectrum, the government could pay private market actors the subsidy for recycling a certain quantity of waste. Alternatively, on the other end of the spectrum, the government could create a nationalized recycling industry where all recycling services are conducted by the state (Policies could fall between these two ends. For instance, government services may collect recycling waste and transport it to private recycling producers who they contract with. Or, some items could be recycled in the market while others relegated to government recycling facilities). The efficiency of recycling will depend upon which end the policy falls. There are three main reasons why we might expect a private recycling industry to be more efficient than a nationalized industry. First, private firms will have stronger incentives to reduce the cost of their services relative to bureaus. Second, private entrepreneurs will have more incentive to innovate recycling technology that will make the recycling process more efficient. Finally, the government faces a knowledge problem when trying to centrally plan the recycling industry.
Private entrepreneurs and bureaucrats operate in different institutions under different incentive structures (See Hazlett and Reilly [43
] for a discussion of how entrepreneurial action differs in the marketplace and bureaucracy). Firms seek to maximize profit by producing the most demanded goods and services at the lowest cost. Thus, firms will actively seek to minimize the cost of production to reap larger profits. Since bureaucrats do not internalize the cost of producing their output, cost minimization incentives are weaker. For the bureaucrat, reducing costs will not increase net benefits unless budget increases are tied to cost effectiveness. When it comes to the production process, private firms stand to gain large profits if they can improve the efficiency of their production processes through innovation. Alternatively, the bureaucrats face disincentives for increasing the efficiency of their production processes. If a bureau produces the same output with less resources than before, it is in their political sponsors’, the politicians who directly support the bureau, interests to allocate less budgetary funds to that bureau. As far as bureaucrats are interested in maintaining their job and salaries, they will seek to avoid such action (Bureaus have often been modeled as budget maximizing agencies [44
]. If this is the case, then bureaus may face incentives to be less efficient in their production process as a strategy to increase their budgets).
Even if the government is able to overcome the hurdles of bureaucracy outlined above, they still face a knowledge problem with having to allocate resources in the nationalized industry. They would have to know the best location for recycling centers and the optimal size of each facility. Since not all waste is the same and some is easier to recycle than others, the government must decide which types of waste should be recycled. Finally, central planners would need to be able to effectively evaluate and innovate the recycling process. In a market for recycling services, this knowledge comes to fruition through the competitive market process. Firms in the wrong location, too small to take advantage of economies of scale, or too big to handle diseconomies of scale, will shut down. When waste cannot be profitability recycled, it will not be recycled at all. Entrepreneurs alert to profit opportunities will incessantly be searching for profitable recycling opportunities. Those who adopt the most cost-effective production techniques and technology will succeed, while those failing to do so will exit the market. Ultimately, there are mechanisms built into the the market process to find solutions to these problems, which will prove increasingly difficult for central planners to solve.
We have discussed three main reasons why free markets and private industry may lead to better recycling outcomes than a regulated or nationalized industry in recycling. Exchanges which could divert waste from landfills are more likely to happen in more economically free countries with less barriers to entrepreneurial action and voluntary exchange. Even if the desired level of recycling is not brought about through private recycling efforts, a subsidizing private industry is likely to have better recycling outcomes because private actors will seek to lower the production costs of recycling and will constantly seek more efficient recycling methods (The production costs of recycling do not only have economic effects, but also environmental effects. The fewer resources and energy used to recycle, the lower the carbon footprint of the recycling process, see Soltanian et al. [14
] for a discussion of some of these effects). Additionally, when recycling is the responsibility of a government agency, there will be greater opportunities for mission creep and the growth of the bureau in other areas. Knowledge problems will be mitigated in the market through competition and profit and loss signals.
Can markets improve recycling performance? If transaction costs are high from economically restrictive state regimes, then recycling is less likely to occur. Alternatively, under more economically free institutions, entrepreneurs will be more able to seize profit opportunities from converting waste to economic goods. This is supported by the findings of this study. The regression results in Section 4.1
showed a relationship between economically free countries and higher recycling rates. Although we cannot be certain of the exact mechanism causing the correlation from our empirical findings, the case studies of countries who relied more on private industry, a prominent organizational feature of economically free countries, tend to have more efficient recycling processes. These results suggest that if countries are concerned with increasing their recycling rates and the efficiency of their recycling industry, they can do so by increasing economic freedom. Economically free institutions allow entrepreneurs to profit more from converting waste to something of value. This paper bridges the gap between the literature on the relationship between institution and environmental problems and on the economics of recycling. We show how institutions that promote entrepreneurship through economic liberalism can increase recycling rates and efficiency.
However, even in the most economically free country, the private recycling market may not be able to lower the negative externalities associated with landfills to desirable levels. In this situation, subsidizing private recycling industry will lead to lower costs of recycling and more innovation in recycling technology than nationalized recycling bureaus. However, a major problem with subsidizing recycling is knowing the optimal subsidy or desired recycling level. Too small of a subsidy may not offset the negative externalities from landfills to the desired level while too large of a subsidy may divert too many resources to the recycling industry. Government planners would need to compare not just the accounting costs, but the economic opportunity costs, of the following possible regimes: (1) waste tax, (2) recycling subsidy, (3) no intervention, and (4) some combination of these policies. Each regime has its own costs. An effective waste tax requires the enforcement of illegal dumping laws, which entails high monitoring costs. Recycling industries use valuable resources in labor and capital with significant economic opportunity costs. Additionally, the recycling industry may pose its own negative externalities on the environment (Recycling can negatively impact the environment through “the collection, sorting, and processing of materials into new products” and thus, “it is unclear when recycling is to be preferred to the use of virgin goods or when waste recovery should replace landfilling or incineration” [42
] (p. 482)). Without intervention, landfills pose significant negative externalities from air pollution that are not fully internalized by private owners. It may be extremely difficult, if not impossible, to compare these solutions to landfill externalities.
For example, although the DRS in the Republic of Korea was instrumental in establishing a private recycling sector, it was plagued by these issues. The main flaw of the DRS was the deposit rate. This rate was set by the Ministry of Environment, a federal government bureau. Because this rate was set by central planners, it was impossible for it to accurately reflect the true cost of recycling. The central planners were “groping in the dark” [67
] (p. 110) and essentially guessing at what rate would result in the “optimal” level of recycling. While the DRS made producers face at least some of the cost of their waste for the first time, the knowledge problem associated with the government setting the deposit rate made the system unsustainable. For the final few years of the program, the refund-to-deposit ratio hovered around 50 percent. This stagnation is easily explained. While some industries were able to reach refund-to-deposit ratios of 100 percent, others did not crack a 10 percent ratio. This is because it was impossible for policymakers to set a deposit rate that accurately reflected the cost of waste management across all industries. For many industries, the deposit rate was never high enough to incentivize them to recycle. There was flexibility under DRS that made it possible for producers to recycle in a cost-effective manner. While this feature of DRS allowed private industries to determine the rate of recycling that was best for them, the government saw this as sub-optimal. After a decade, the federal government discarded DRS and replaced it in 2003 with the EPR system, further exacerbating the knowledge problem.
One way to approach these dilemmas is through polycentric governance. We can think of the provision of waste management services as a public service industry. Work from Ostrom [68
] shows the advantages of a polycentric approach to public service provision. Top-down monocentric policies may not fully account for the important geographic details and tacit knowledge of community actors. Enforcing illegal dumping laws or creating recycling opportunities for private actors may be better handled at local levels. Alternatively, some communities may completely ignore their negative externalities from landfills, or ship their waste to foreign landfills while other communities take too costly of actions to reduce their landfill waste. Some combination of policy set at the federal and local levels and various nodes of private and public governance may be the optimal way to tackle these difficulties.
The findings in this paper present opportunities for future work to further explore alternative paths to recycling and other waste management policies. As noted in the discussion of the results, a key limitation of our regression estimates is the inability to determine the exact mechanisms by which economic freedom is positively associated with increases in recycling rates. We speculate that property rights specifically play an important role here; however, more research is needed to test the validity of that hypothesis among other potential mechanisms. Alternative research designs focusing on specific policy changes may also be more fruitful in recovering causal estimates of the effects economic freedom has on recycling rates. The case study approach to outlining the differences between private industry versus government management of recycling also has limitations. While we do compare two relatively similar countries, more data is needed to have more general evidence of the substantive differences in efficiency between recycling management institutions. There is a sound theoretical basis for the inefficiencies related to bureaucratic management, but the size of those inefficiencies is inherently an empirical question that can be answered with more data. Significant variation in waste management policies, even within individual countries, presents an opportunity to begin establishing better estimates of those inefficiencies. Furthermore, a limitation of our analysis is that it relies only on the economic theory underlying recycling policy. Additional complementary research is needed to assess the sustainability of various recycling policy schemes, such as those carried out for refinery systems [69