Microeconomics: Recycling

Microeconomics Recycling

In each country, including the U.S., there is a group of production waste that creates typical environmental problems. It includes waste paper, textile and plastic waste, used tires, and others. Some of these materials present a commercial interest and are processed and recycled. However, it is true for only a small share of waste, meaning that business opportunities are still quite high in this sphere of activity. Currently, a wide array of technologies used for the processing of the types of waste mentioned above have been developed and presented, making it possible to adjust the recycling process depending on various external and internal factors. At the same time, a list of products manufactured by recycling is very diverse. As a result, a potential entrepreneur will have a certain degree of flexibility, should the decision on opening a recycling plant be made. Moreover, the question of increasing the proportion of recycled waste becomes acute due to the increasing volumes of disposed waste in landfills. The experience of developed countries, including the U.S., shows that the lion’s share of waste is processed by small businesses. Despite the relative simplicity of establishing and operating an enterprise of such class, its efficiency and profitability are likely to depend on the combination of economic and administrative support. Moreover, the costs required for the business to operate may outweigh the benefits it brings. Therefore, the following work is dedicated to the assessment of the feasibility of the decision to open a recycle plant in the U.S., both in the economic and ecological terms and from the point of view of an entrepreneur who has a personal interest in it.

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From the ecological perspective, the decision to establish a recycling plant is feasible as it will bring the following benefits not only to the entrepreneur, but also to society. First of all, the credibility of such companies is rather high, providing a stable business environment, and, therefore, the reduction of operational risks. Moreover, by obtaining the status of a socially responsible company it will be possible for the firm to increase its market value due to increased attention to waste recycling on the part of the community and the government (Kotler & Lee, 2011). However, a stable business environment and the status of a socially responsible company alone do not guarantee that the recycling business will be successful and profitable from the long-term perspective, as they are not enough to justify the decision on the establishment of a recycling plant. In order to avoid financial losses in the future, it is required to conduct an economic assessment of the benefits and costs of the project. First of all, it is necessary to define the type of materials the company will work with. Based on the consumer properties of waste as secondary raw materials, it can be divided into four types:

  • High-quality waste (metal waste, high-grade paper, and cullet waste);
  • Average-quality waste (a mix of waste paper, chunks of wood waste, used tires, and others);
  • Waste that is difficult to recycle (down feather, waste from the ventilation chambers);
  • Non-utilizable waste (laminated paper and packaging from toxic products) (Worrel & Reuter, 2014).

It should be noted that revenues from the sale of high-quality waste usually exceed the expenditures on its collection, primary processing, and recycling. In case of average-quality waste, revenues and costs are roughly equal. The processing of waste that is difficult to recycle is mostly unprofitable. Finally, the processing of non-utilizable waste requires special funding. The process of collecting and recycling waste can focus on production waste (it is collected and processed in the first place and has high profitability), consumption waste (low profitability), and household waste. Nowadays, all types of high-quality and average-quality waste are recovered early. At the same time, waste of average quality and the one that is hard to recycle are the most likely sources of secondary raw materials (Porter, 2010). By summarizing the information provided above, it is possible to say that the company should focus on the processing and recycling of average-quality waste. Consequently, there are the following prerequisites for the development of small enterprises in the field of waste recycling: proposals of waste technologies for recycling, availability of materials to work with, and the public interest in it.

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At the same time, it is clear that investments in the enterprise are one of the main conditions of its efficiency. Under modern economic conditions, a payback term of capital costs is no more than 1-2 years. However, despite this, the rapid development of small enterprises for the processing of waste is not observed. As a result, prior to making a decision on establishing such company, it is necessary to evaluate the effectiveness of the most common low-tonnage technologies for processing the selected types of waste (Porter, 2010). In addition, it is required to pay attention to marginal costs, including the ratio of growth of variable costs to the growth of production output. At the initial stage, marginal costs will be rather high. Later, with the development and increase in production output, they will fall, and then again begin to rise as a result of the law of diminishing returns, in case the technology is not improved. In addition, it is also required to pay attention to the marginal revenue of the newly established company as a ratio of income growth to an increase in commodity products. The maximum profit is received in case when marginal revenue equals marginal costs. Under modern conditions, marginal revenue must be equal to the selling price. Therefore, in order to determine the optimal volume of production, the price for company’s products must be equal to its marginal costs. An increase in production is expedient as long as the price and marginal costs are equal. However, in case the price is below average variable costs, production capacity must be reduced (Boyes & Melvin, 2015). The optimal production capacity of small recycling plants usually does not exceed 5-6 thousand tons of recycled waste per year for the following materials:

  • Paper (insulation materials, fiber boards, lumpy pads and polymer-paper plates);
  • Wood waste (wall stone, fuel briquettes);
  • Used tires (crumb rubber);
  • Plastic waste (crushed and granulated plastic and resin-polymer tiles);
  • Textile waste (heat insulating materials) (Worrel & Reuter, 2014).

As it has been mentioned before, the expected payback period for the newly established company should not exceed two years. However, it should be taken into account that in most cases, the level of prices for products made from waste is not competitive with similar products offered in the market. It is especially true for average-quality waste, with which the company will work. As a result, in order to guarantee a refund within two years, prices for its products must be much higher than the ones of competitive goods. However, such measure does not contribute to the competitiveness of the company. As a result, with the exclusion of the return of interest on loans, the payback of capital costs will take 3-5 years for most of the materials mentioned above (Porter, 2010).

The cost of goods sold primarily consists of energy expenses (about 20-45%). In case high-quality raw materials or recycled materials are used, the share of expenditures on raw materials in the total production costs increases from 16-25% to 40-80%. Wages of workers may account for 35% of the total costs. It is also necessary to take into account payments for waste disposal, the so-called environmental charges. These payments are usually not an incentive for production waste recycling and are significantly lower than capital expenditures (Porter, 2010).

Summarizing the information above, it is possible to say that the decision to establish a small waste recycling company in the U.S. is not feasible, and, therefore, it is likely to be cancelled or postponed. However, in case of the provision of certain support measures, it will be possible to create conditions for the short-term payback of capital costs. As has been mentioned before, there is a public interest in waste recycling. As a result, it is possible for the entrepreneur to enlist support of the local community and environmental organizations. In turn, this support will allow negotiating with the local government to provide the following benefits for the waste recycling industry:

  • The provision of soft loans, grants, and donations from the budgets of all levels, namely the payment for environmental charges;
  • The establishment of a system of orders for waste recycling;
  • The provision of tax incentives;
  • To introduction of a fee for the processing of waste and a ban on its placement in the landfill.

In addition, it is possible to conduct a research to recycle and produce products that are scarce in the local region. Under such conditions, the efficiency and survivability of the newly established company will increase, which may influence the decision-making process, ensuring the feasibility of opening a recycling plant.

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