Government eco‐innovation incentives in a recycling system: A Stackelberg‐type model

Abstract As past economic progress has come at the expense of diminishing natural resources, increasing pollution and widespread damage to ecosystems around the world, an imperative we must respond to is to seek ways in which to achieve economic, social, and environmental sustainability, including actions aimed at a circular economy and eco‐innovation. Recycling has numerous implications for the environment, economic and production performance, employment, and production of wealth. The environmental regulator must therefore consider all the aspects of the waste cycle when deciding the right policies to maximize social welfare. We consider three types of agents involved in a Stackelberg game: manufacturers, importers and sellers (MIS), recyclers, and the government acting as an Environmental Protection Agency (EPA). In our model, we introduce the cost to adopt new technology for eco‐innovation per unit produced by the MIS, resulting in the possibility to reduce the weight of the advanced recycling fees if they invest more in the aptitude to be recycled of their products. The results give interesting prompts to investigate the relationship between environmental taxation and ecological incentives.