Technological externalities

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Due to specific product and material characteristics, there are many wastes in which technological externalities are widespread (e.g. composite and multi-layer plastics, metal composites, post-consumer electronic appliances, etc.). All of these product characteristics provide positive benefits, or they would not be undertaken. These benefits are reflected in the value of the goods in the market place. However, they also generate costs (i.e. increased sorting or reprocessing costs), and if there is no means whereby the "costs" are transmitted back up the product chain to product designers and manufacturers, these costs will not be reflected in the marketplace.

Box 5.1. Technological externalities

A technological externality exists when the production function of one agent enters another agent's production or utility function, without the latter being compensated (Kolstad, 2000). Environmental externalities (when they affect productive processes such as polluted irrigation water) are, of course, specific examples of the more general case of technological externalities. However, they are by no means the only type of technological externality. In this section, the focus of the discussion is on "non-environmental" technological externalities which tend to reduce recycling rates. In the area of waste, technological externalities would arise when one firm manufactures a product in a way that increases the cost of recycling for the downstream processor, but for institutional reasons there is no means by which the potential waste recovery facility can provide the manufacturer with the incentives to change their product design (Porter, 2002 and Calcott and Walls, 2000).

71. The Austrian government undertook a study in 1994 which examined whether product standards have discouraged the use of recyclable materials.

As noted in the synthesis report, markets often address such problems.72 But, what can public authorities do to contribute to their resolution? Possible avenues would include:

  • In cases where product standards are promulgated to ensure some public objective (e.g. hygiene standards for plastic packaging), ensure that environmental public objectives are also taken into account if there are missing markets associated with such impacts. This is particularly important if there are trade-offs in product design between the two objectives.
  • Introduce policies which "bracket" the missing market, for instance, a deposit-refund or subsidy-tax scheme which is levied according to the degree of recyclability of the product, would encourage "design for recycling". In theory a take-back scheme would have the same effect, but may allow for less differentiation according to product characteristics and has potentially high administrative costs.
  • Introduce measures which reduce the costs of such externalities - i.e. by providing information to demanders of recyclable waste on means of recovering reusable materials.73 For instance, in Austria, the Ordinance of End-of-Life Vehicles facilitates material and component recovery through the application of material and coding standards and dismantling information.

In addition, many countries (Japan, France, UK, Korea, Austria) report having provided support for research and development into product design which facilitates recycling. It may also be possible to support research and development for technologies used in sorting and reprocessing facilities. However, while this may increase the degree of recyclability of affected goods by overcoming the technological externality, it must be recognised that this does not remove incentives for product design which results in technological externalities in the first place, and may even provide incentives for their exacerbation.

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