Price ambivalence of secondary resources: joint production, limits to substitution, and costly disposal

The paper studies price ambivalence of secondary resources based on the model of a vertically integrated two-sector economy with resources and waste. It is shown that even for preferences, technology and waste damage function satisfying standard assumptions, in particular,monotonicity and convexity, both the efficient shadow price and the competitive equilibrium price of the secondary resource may be positive, zero or negative. Rigidities in the supply of the secondary resource, limits to substitution between the primary and the secondary resource, and costly disposal are identified as crucial for this result. Empirical evidence of price ambivalence comes from the German spot market for waste paper. © 2004 Elsevier B.V. All rights reserved.