No return, no refund: an analysis of deposit refund systems

Abstract

Firms and governments in developed economies frequently employ deposit-refund systems to promote return and reuse of product packages and containers. We analyze a model of monopoly facing heterogeneous consumers in which recycling (package return by consumers) generates an external benefit. It is shown that when consumer’s preferences over recycling differ, the monopolist can price discriminate between consumers leading to socially suboptimal recycling. In the absence of any externalities, the analysis can be viewed as a model of coupons or mail-in rebates which work as price-discrimination devices. The role of government subsidies and additional deposits to eliminate suboptimal recycling is also analyzed. Finally, the model is extended to incorporate hustling, i.e., allowing consumers to recycle packages discarded by other consumers.