The Economics of Waste Valorization

As the spread of waste imposes substantial environmental and economic burdens, a newer operational strategy, waste valorization, is gaining attention. This approach transforms production-generated byproduct waste into valuable, distinct products, creating intricate production and demand interdependencies that traditional strategies like remanufacturing and coproduction cannot fully capture. In this study, we examine the impacts of these interdependencies within a two-stage stochastic production decision model to determine optimal production quantities under waste valorization. Our findings reveal that a higher waste valorization rate does not always benefit the manufacturer, especially if the waste incurs disposal costs. When product demands are uncorrelated, the manufacturer’s optimal profit can exhibit an inverse U-shaped relationship with the valorization rate, attaining its maximum at a moderate level that maintains a perfect balance in production. Conversely, when product demands are correlated, the manufacturer employs a “pool-to-center” strategy, using different pooling policies to smooth production quantities and minimize disparities with respect to the valorization rate. Surprisingly, as demand randomness or correlation intensifies, the optimal profit becomes M-shaped, with profit maximum shifting toward either low or high valorization rates, a phenomenon we term “go-to-extreme.” Although waste valorization can yield both economic and environmental benefits, we caution that a more efficient waste valorization process may lead to negative outcomes for both the manufacturer and the environment. This analysis not only sheds light on how waste valorization contributes to waste reduction and economic value, but also provides insights for production decision making.

This paper was accepted by Caroline Flammer, sustainability.

Funding: Financial support from the National Science Foundation of China [Grants 72301055, 72322017, 72471244, and 72101102] is gratefully acknowledged.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.08500.