We have seen that exhaustible resource markets deplete low-cost sources first, and tap alternative higher-cost sources as time goes on. If the resource is recyclable, then recycling of residuals represents an alternative (presumably higher-cost) source which becomes economically viable as prices of virgin resources increase.

Suppose R percent (0 < R < 1) of a resource is recycled after each use. If we start with initial stock A, we recover RA after the initial use of A, R²A from re-use of RA, R³A from re-use of R²A, etc. So recycling increases the effective resource from A to the sum A + RA + R²A + .... The infinite series sums to A/(1-R). Note that the marginal cost of recycling rises with R, and 100 percent recovery is unlikely to be economically feasible.

Tietenberg distinguishes new scrap and old scrap. New scrap is generated from production, is easily recovered because it never leaves the factory, and tends to be recycled through the production process efficiently. Old scrap is generated from consumption. It is geographically dispersed, may be contaminated with other residues, and is generally more costly to recover.

Recycled resources often have a hard time competing for market share with virgin resources. This is due to market failure: most consumer goods generate waste disposal costs which are not borne by either the consumer or the producer. (Conventional pricing of trash collection services implies households have zero marginal cost of trash although marginal landfill costs are positive.) Residuals cause environmental damage, or take up costly landfill space, or both. Recycling reduces these costs, but is only viable if there is sufficient market demand for recycled materials.

Recycling can be motivated by (1) marginal cost pricing of trash disposal (e.g., Highbridge, NJ's sticker system); (2) by refundable deposits on consumer goods generating trash (e.g., aluminum cans), or (3) by corrective taxes on virgin resources and/or subsidies for recycling. Taxes on virgin resources are justified if either extraction generates environmental externalities, or dependence on foreign suppliers represents a strategic risk which can be reduced by a tax (tariff).

The development of markets for recycled materials in the US has been slow. Most public recycling programs have increased the supply of recyclable materials, but have ignored the demand side, so prices of recycled materials (e.g., newsprint) have collapsed, many collection centers merely ship materials to landfills, and private recycling firms have been driven out of business.

Review Spofford's analysis of pulp recycling. Private optimum (minimum total private cost) is where marginal cost of virgin pulp equals marginal cost of recycled pulp. Social optimum is where marginal costs of virgin pulp including external damages and treatment and disposal costs equals marginal costs of recycled pulp. The socially optimal rate of recycling is higher than the private optimum rate.

Depletion allowances exempt some virgin resources from taxation, indirectly favoring use of those resources in place of recycled resources. A severance tax does the opposite, although these taxes have little influence in practice. Transportation costs are a major component in total recycling costs. Rail freight rates set by the Interstate Commerce Commission have traditionally discriminated against scrap. Tietenberg calls for "selective disengagement" of government to eliminate these distortions, along with enforcement of programs to get companies to internalize the costs of environmental damage associated extraction and disposal of virgin resources.

Packard's book The Waste Makers argues that companies plan product obsolescence. Functional obsolescence results from continuing technological improvements. Fashion obsolescence results from market manipulation of consumer tastes. Planned durability obsolescence would make consumers buy replacements sooner than they otherwise would, but isn't a rational marketing tactic unless consumers are ill-informed or the market is monopolized.