Garbage, Recycling, and Illicit Burning or Dumping

With garbage and recycling as the only two disposal options, we confirm prior results that the optimal curbside fee for garbage collection equals the direct resource cost plus external environmental cost. When illicit burning or dumping is a third disposal option that cannot be taxed directly, the optimal curbside tax on garbage changes sign. The optimal fee structure is a deposit-refund system: a tax on all output plus a rebate on proper disposal through either recycling or garbage collection. The output tax helps achieve the first-best allocation even though it affects the choice between consumption and untaxed leisure.