Advance disposal fee vs. disposal fee: A monopolistic producer’s durability choice model

This study examines how the timing of waste disposal fee collection affects the producer’s choice of built-in product durability and social welfare in a durable-goods monopoly model. We categorize the waste disposal fee policies into two: advance disposal fee (ADF) policy and disposal fee (DF) policy. We show that a DF policy has two opposing effects on durability. Firstly, a DF policy gives the producer an incentive to increase durability in order to delay the households’ waste disposal and to discount future payments of the disposal fee (the payment-discounting effect). Secondly, a DF policy creates an incentive for consumers to dump waste illegally in order to mitigate the payment of the disposal fee, and gives the producer an incentive to reduce durability in order to avoid market saturation and the associated future price cuts (the illegal-dumping effect). When the disposal fee is low, the payment-discounting effect dominates the illegal-dumping effect under a DF policy, leading to the enhancement of durability. In this case, from a social welfare viewpoint, a DF policy may be more desirable than an ADF policy if the environmental damage associated with illegal dumping is not serious. However, when the disposal fee is high, a DF policy induces more illegal dumping, reduces durability, and inflicts more environmental damage. Therefore, an ADF policy is more socially desirable than a DF policy when the disposal fee is high. Moreover, we consider an oligopoly case and find that an ADF policy is more socially desirable in an industry with smaller market power.