The degree of "risk aversion" associated with goods manufactured from some recyclable materials (retreaded tyres, used lubricating oil, etc.) appears to be out of proportion to the actual inferiority of the products relative to substitute goods manufactured from primary materials. In cases in which consumers" preferences are affected significantly by the preferences of other consumers (i.e. consumption externalities), this can undermine the market for recyclables significantly. The cases of retreaded tyres and re-refined oils show this clearly, but it also appears to affect other markets such as recycled newsprint, plastic lumber, etc. Since initial buyers of new products are not rewarded in the market for the information about product quality that they provide to other market participants, there can be barriers to the development of such markets.
In many cases government policies may be unintentionally having the opposite effect, undermining confidence in the market.71 In addition, public authorities should be aware of the potential impact of consumption externalities and risk aversion on the market, and avoid using eco-labels which specify recycled material content for affected goods. Even if consumers have "preferences" for the use of recycled material for environmental reasons, in some markets this may be partially undercut by their risk aversion for perceived quality reasons. Without support information programmes, in such cases the positive consequences of the "eco-label" on demand may be undone by the negative consequences.
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