Flexible Waste Management under Uncertainty
Luca Di Corato, Department of Economics, Swedish University of Agricultural Sciences
Natalia Montinari, Strategic Interaction Group, Max Planck Institute of Economics
In this paper, we use stochastic dynamic programming to model the choice of a municipality which has to design an optimal waste management program under uncertainty about the price of recyclables in the secondary market. The municipality can, by undertaking an irreversible investment, adopt a flexible program which integrates the existing landfill strategy with recycling, keeping the option to switch back to landfilling, if profitable. We determine the optimal share of waste to be recycled and the optimal timing for the investment in such a flexible program. We find that adopting a flexible program rather than a non-flexible one, the municipality: i) invests in recycling capacity under circumstances where it would not do so otherwise; ii) invests earlier, and iii) benefits from a higher expected net present value.
Luca Di Corato and Natalia Montinari,
"Flexible Waste Management under Uncertainty"
(February 12, 2013).
Fondazione Eni Enrico Mattei Working Papers.
Working Paper 754.