price has the same indefiniteness as a definition of recycling based upon flow path. As markets change, the flow path of a given material changes. And as markets change, definitions of material status based on price change as well. What happens to a firm that applies for a bond on the basis of scrap which generally bears a zero price, but which occasionally bears a positive price? Are converting residuals which are valuable as home scrap but not sufficiently valuable to other firms to pay for transportation costs included in this definition of solid waste? It is an economic fact that what is recycled and what is "waste" will change from month to month as markets change. Thus, definitions based on flow path and price are realistic but hard to administer on a working level. Definitions in terms of commodity names are likely to lead to complicated negotiations over which commodities deserve inclusion. They are likely to get out of date as well. Either way there is a drawback for a working definition of recycled as scrap. This is an unavoidable problem-more or less important depending on the material in question-for incentives which require specific working definitions of recycled scrap. However, not all incentives to encourage recycling require working definitions of recycle or waste. Elimination of existing subsidies for virgin material extraction would encourage recycling and avoid the above definitional problems.

MATERIAL AND ENERGY FLOWS

Materials and energy are closely related in a dual way. Not only are all material flows pushed along by inputs of energy, but also materials in the form of final products take on value only by inputs of energy. (While energy flows are in a fundamental sense a source of value this does not mean that all sources of energy are equally valuable.) To save on material throughput is very likely to save on energy and increases in many, but by no means all, recycling flows conserve energy as well. Correspondingly, energy flows are valueless unless they take on some material embodiment. Energy sources are often materials extracted from the environment like other materials. But more importantly to develop energy sources, whether they be solar, fossil, hydro or nuclear, large structures of physical capital are required.

While aware of the duality, it is possible to think of energy, in an economic sense, as just another commodity in material flows. Like other materials energy is "produced," bought and sold, used, reused and thrown away. In the sequel the term "material flows" should be construed broadly enough to include energy flows.

COMPETITION BETWEEN PRIMARY AND SECONDARY MATERIALS

1

In many places in the economy secondary (scrap) materials compete directly against primary (virgin) materials. If a particular secondary material were a perfect substitute for its primary counterpart, analysis would be easier. If the price of a secondary material were lower than the price of a primary counterpart, the secondary material

1 For a discussion of many of the technological and institutional issues related to recycling, see Burke, J. M. and Fisher, The Realities of Recycling, Staff Report, Minnesota Pollution Control, Minneapolis, Minnesota, January 1973.

would displace the primary, and vice-versa for secondary prices higher than the primary counterpart. Substitution between secondary and primary material would continue until the prices were equalized. A 1 percent increase in the cost of primary material (due, for example, to the imposition of a severance tax) would not mean that secondary material would completely replace primary. As more secondary material came into the market, the cost of supply would go up. The cheapest and best sources of secondary are supplied first and the more costly sources only appear in the market when the price goes up. Supposing that the price of primary increases by 1 percent, the question is how much new supply of secondary would move through the market before the cost of supply is driven up by 1 percent, at which time the prices of secondary and primary are again equalized. This question defines the elasticity of supply: the percent increase in secondary material which would be supplied to the market when the price of secondary material goes up by 1 percent.

Figure 2 illustrates the case where primary and secondary materials are perfect substitutes. In panel I, Curve A is a schedule relating quantity of scrap material supplied by dealers to various market prices. A is the supply curve of scrap. In panel II, B shows how much primary material is supplied to the market as a function of price. As primary and secondary materials are assumed substitutes, these two prices are equalized by market competition. In panel III the total supply of material (C) is defined by simply adding the amounts supplied of primary and secondary material at each possible price (the quantity scale of III is somewhat compressed as curves A and B are added horizontally to define C). The demand for material is represented by D and the market equilibrium by the intersection of D and C, where the price is P (panels I, II, and III). The total supply of material is Se, the supply of primary is s, and secondary is s1.

Now suppose a severance tax is imposed upon virgin materials.2 The effect of this tax is to shift B upward by the amount of the tax to B'. Just as A and B are added horizontally to define aggregate supply C, with the tax, A and B' are added to define a new total supply curve C' which incorporates the presence of the tax. After the market adjusts to the tax, total material supplied is s., of which s, is the amount of primary material supplied and s, is the amount of secondary material supplied. If the percentage change in price from P to P' happened to be 1 percent the elasticity of supply of secondary material would be illustrated in panel I. The elasticity of supply would be (S2-S)/S1. Note that "supply" in the above context does not refer to the total amount of scrap physically "out there" or the amount of new scrap discarded into the environment in a year. In the above context supply refers to the amount of material offered by dealers to producers at a point where scrap may be substituted for primary material. The elasticity of supply is a measure of the dependence of supply offered on the market price of secondary material. Clearly, in trying to guess the effects of incentives to increase recycling, estimates of the elasticity of supply are very important. Unfortunately there are very few studies which attempt to estimate elasticities of supply. EPA considered contracting elasticity studies on scrap glass, aluminum, plastics, iron, and rubber. However, contracts have not been given for these studies, and it appears unlikely that they will be given in the near future. James Sawyer, in his Ph. D dissertation, made estimates of supply elesticities of scrap iron and steel. His estimate: a 1 percent rise in the price of scrap iron would elicit between a 5 percent and 20 percent increase in scrap supply, depending on scrap and market characteristics. It should be noted that if the price of scrap went up by 1 percent due to an increase in the cost of primary material, this 5 to 20 percent range represents not an increase in scrap inventories but 5 to 20 percent increase in scrap bought by steel mills, etc. Compared with elasticities of supply estimated for primary material, these estimates are quite large.

However, the world is not so simple, and secondary and primary materials are generally not perfect substitutes. Secondary aluminum, for example, typically has traces of other metals mixed in with it, which make secondary aluminum less suitable for extruding, rolling and cold shaping. Consequently, secondary aluminum is used mainly in the casting business, where its contaminants are less of a disadvantage. Except where primary aluminum competes with secondary aluminum in the casting market, primary and secondary aluminum are often not direct competitors. Similarly, most primary and corresponding secondary materials are imperfect substitutes. Where primary and secondary are imperfect substitutes, it is important to estimate the relation between the price for the primary material and the price and quantity of secondary material cleared through a market. How much more secondary material will be bought if the price of the competing primary material increases by 1 percent? This is called the cross elasticity of supply.

2 A severance tax, also called a yield tar for forest products, can be based on the units of material extracted or on a percentage of the value of the material extracted.

INDUSTRY STRUCTURE

For aluminum, iron, copper, other metals, and other recycled materials, the industry structure is more or less as follows. For each industry the primary producers form an oligopoly, each with a small number of large producers. Prices for the primary product are sticky both upward and downward. Indeed the posted price for some prímary metals remains constant for years. In response to market pressures there are discounts, more or less secret, on the posted price. In this way the actual effective price moves in a narrow range within a few percent of the posted price, and the secrecy has confounded attempts to model primary-secondary competition. In contrast there are a large number of secondary producers, each one much smaller and less financially strong than the average primary competitor. Secondary dealers act like commodity traders, which in fact they are. Inventories build and shrink, and quantities cleared in the market are very responsive to price. Prices quoted in the trade journals are very volatile, and there is less of a discrepancy between posted and effective prices.

An important reason for the volatility of secondary prices is the rigidity of primary prices. Without an oligopolistic structure for the primary industry, changes in demand for the final product would be transmitted backward to suppliers of the primary material as well as suppliers of the secondary. But as the price signals are attenuated in the primary industry, the price signals are amplified for the secondary industry. Volatile price movements in the secondary industry encourage a large inventory capacity so that secondary material can quickly be sold or stored. Thus, it seems that part of the reason why Sawyer found very high elasticities of supply was because of the speculative inventory adjustment aspect of the secondary industry. (There are, though, local ordinances and other strictures which limit storage capacity, besides ordinary inventory storage costs. Inventory storage costs are particularly important for perishable materials like secondary paper.) Besides very short run inventory changes the secondary industry is flexible in changing plant capacity and will grow, or shrink, in response to price changes. Because a disproportionate share of market adjustment falls upon them, secondary industries do a favor, of a sort, to the primary industries. They partially insulate the primary industries from the buffets of market fluctuations, making it easier for primary prices to remain sticky.

CRITERIA

It is often suggested that we would be better off if we recycled more, in order to conserve future resources and diminish disposal costs. But how much recycling is enough? Should post-consumer aluminum be recycled more or less than post-consumer copper? How much should post-consumer paper be encouraged for recycle compared with commercial waste, with home scrap, with sawdust? An alternative to recycling which would also conserve resources and lower disposal costs is to increase product durability. What is the proper balance between increasing product durability and increasing recycling? A second alternative to recycling is to shift toward products which are less material and energy intensive. How much, if at all, should we encourage

bicycles over automobiles, and how should we substitute incentives to recycle for incentives to produce less material and energy-intensive products? What are our obligations to the future in terms of resource conservation? The goal "recycle more" is too broad and too vague to resolve those questions. In order to choose among the many policy alternatives, all of which would "recycle more," secondary goals are sometimes recommended such as (1) administrative simplicity and (2) minimization of economic disruption.

Yet these secondary criteria don't help answer the most basic question: when is there enough recycling? In many cases 100 percent recycling is impossible, because recycling processes generate their own residuals. And there are diminishing returns to recycling: recycling becomes more expensive as a process moves toward 100 percent recycle. Plutonium, for example, is extremely dangerous: quantities less than .0003 ounce produce cancer and its half-life is 24,000 years. Because of plutonium's extraordinary danger, the AEC has gone to great lengths and expense to insure plutonium recycle at as near to 100 percent as possible. Yet the AEC still estimates a 1 percent loss rate into the general environment over the fuel cycle. For less harmful materials, it makes less sense to maximize the amount of recycling, regardless of cost.

In the studies by EPA and CEQ on recycling, there is little discussion of criteria or how to go about deciding which criteria are most desirable. Without criteria there is simply no way to resolve the above questions. The simple criterion "recycle more" will not help choose which incentives are better than others. "Recycle more" gives no clue as to when there is enough recycling, short of 100 percent, which is in general impossible, as in the case of plutonium, or undesirable, as in the case of most materials due to increasing costs. Below we formulate two criteria which help to resolve the above questions. It is left to the reader to judge their appropriateness and desirability.

THE EFFICIENCY CRITERION

The basic tenet of the price system is that prices should reflect costs (more precisely, here and below, marginal costs). If a product price does not incorporate all the costs of its production, because, perhaps, the product is produced by a polluter who pays neither for abatement nor for compensation to downstream sufferers, the product price will be too low compared with the total of private and socially borne costs. There will be too much pollution and too much of the product sold. On the other hand, if a product price is higher than the cost of production, because, perhaps, the producer is a monopolist selling at monopolist prices, people will be signaled by the inflated price to stay away so that too little of the product will be produced. In either case resource allocation could be changed so that some people are better off without making others worse off. When prices reflect all costs, including pollution costs, the economy is said to be efficient, in an economic sense. No one can be made better off without making someone worse off. The efficiency criterion is the rationale for the Polluter Pay Principle: the polluter should pay for the cost of his pollution, by paying for abatement equipment which lowers the pollution damage and by paying for the residual damage. Basically, Polluter Pay Principle says