Flexible waste management under uncertainty

In this paper, we use stochastic dynamic programming to model the choice of a municipality which has to design an optimal waste management program under uncertainty about the price of recyclables in the secondary market. The municipality can, by undertaking an irreversible investment, adopt a ‡exible program which integrates the existing land…ll strategy with recycling, keeping the option to switch back to land…lling, if pro…table. We determine the optimal share of waste to be recycled and the optimal timing for the investment in such a ‡exible program. We …nd that adopting a ‡exible program rather than a non-‡exible one, the municipality: i) invests in recycling capacity under circumstances where it would not do so otherwise; ii) invests earlier, and iii) bene…ts from a higher expected net present value. keywords: Real Options, Flexibility, Municipal Waste, Recycling jel classification: C61, Q53 The authors gratefully acknowledge Michele Moretto for useful comments. The usual disclaimer applies. yCorresponding address: Department of Economics, Swedish University of Agricultural Sciences, Box 7013, Johan Brauners väg 3, Uppsala, 75007, Sweden. Email: [email protected]. Telephone: +46(0)18671758. Fax: +46(0)18673502. zStrategic Interaction Group, Max Planck Institute of Economics, Jena, Kahlaische Strasse, 10, 07745, Germany. Email: [email protected].