Socially optimal and fund-balanced advanced recycling fees and subsidies in a competitive forward and reverse supply chain

• We determine the socially optimal advanced recycling fee and subsidy fee.
• We compare with the current practice of the fund balance model.
• We consider the interactions among the entities in a closed-loop supply chain.
• This paper demonstrates a market distortion in the current practice.

Advanced recycling fees (ARFs) and government subsidy fees are important for curtailing the consumption of new products and encouraging recycling and disposal of end-of-life (EOL) products. We introduce a model consisting of a leader (the Environmental Protection Agency, EPA) and two groups of followers (MIS firms and recyclers) consisting of manufacturers, importers and sellers, and recyclers which compete in both consuming and recycling markets. The EPA determines the ARFs paid by the MIS firms and the fees subsidizing recyclers to maximize the social welfare in closed-loop supply chains where the MIS firms and recyclers attempt to maximize their respective profit functions. To compare with current practice, we describe a conceptual fund balance model to determine the ARF and subsidy fee on the basis of the balance between total collected ARFs and expenditure of subsidies. Using numerical examples for the laptop computer market in Taiwan, we demonstrate that our results outperform the current practice.