Optimizing production technology choices: conventional production vs. recycling

The present study examines the optimal use of renewable resources and how optimality is linked to the accumulation of waste stock. Production technology choices are based on a maximization of a discounted stream of net utility over time with respect to constancy of environmental services. When adopting a socially optimal tax-subsidy scheme to price produced goods, the ultimate utility level is determined by how tax revenues and subsidies compensate each other in monetary terms. Therefore, the constraints imposed on the optimal use of economic instruments in promoting recycling when a government budget is balanced are also studied. The materials balance structure of the model yields steady-state comparative statics and dynamic envelope results with interesting policy implications.