Increasing the rate of recycling when demand is price-inelastic : a case study of the market for old newspapers

The demand for old newspapers (ONP) as an input in newsprint production is an example of a market where policies that aimed to encourage recycling by shifting the supply of ONP (and thus, lowering price) have not resulted in a large and immediate increase in recycling. One reason these policies have not effectively stimulated recycling in the newsprint industry is that the ONP input demand schedule is highly price-inelastic. This hypothesis is tested by developing and estimating a model of the demand for ONP as an input in newsprint production. Econometric analysis of the derived demand for ONP reveals that the demand for ONP by newsprint producers is price-inelastic in both the short- and long-run. Thus, under current conditions, the application of supply-side policies alone, which attempt to increase recycling by lowering the relative price of ONP, will not significantly boost the rate of recycling in the U.S. newsprint industry even in the long-run. Further, because the ONP demand schedule has been estimated as a system of five input demand equations, the relative efficacy of other policies that have been suggested for increasing the rate of ONP recycling can be assessed. Tax policy has been criticized for discouraging recycling for a number of secondary materials. In the case of ONP, it is found that fiscal biases in favor of virgin materials probably have not been a major hindrance to recycling in the newsprint industry. A slightly more effective policy may be tax preferences that alter the price of capital and create an incentive to expand newsprint capacity. The major finding of the study is that ONP recycling in the newsprint industry is more dependent upon the parameters of the final output market than it is on relative input prices. Growth in ONP consumption has historically arisen as a consequence of output expansion in the U.S. newsprint industry. In sum, expansion in output requires investment in new newsprint capacity and this investment has been biased toward ONP-based mills.