Abstract
Real-world applications of a deposit-refund system are not widespread, although it has been recommended in various studies. This gap can be attributed to the negative impacts of this system on suppliers. However, this aspect has been ignored by previous studies so this paper considers the economic implications of policies mitigating these negative impacts.
We consider two mitigation policies in an economy with a representative consumer, a representative supplier and the government. One policy allows the supplier to maintain unredeemed deposits, which represent the difference between deposits and refunds. Another policy pays the supplier a handling commission.
The results can be summarized by two main points. First, when there is a negative externality from used products not being returned, the government should collect unredeemed deposits from the supplier and the percentage of unredeemed deposits the government should collect depends on the relative size of the negative externality compared to the deposit. Second, the payment of a handling commission has no effect on social welfare but paying this commission could decrease the burden on the supplier.
JEL Classification: H23, Q58
