A Stochastic Model of Waste Management with on and Off Site Storage

Abstract

When the regulatory threshold which specifies the maximum amount of waste that can be stored on site is exceeded, a waste generating firm must move waste to an off site location. Given that off site storage is costlier than on site storage, how much waste ought a firm - operating in a probabilistic environment - to produce in the time period of interest? This salient question has received insufficient theoretical attention in the extant literature. Therefore, we analyze a stochastic model with on and off site storage that is relevant to the management of a broad class of wastes. We first derive a representative waste generating firm's long run expected cost function. Next, we conduct comparative statics exercises to demonstrate the impact of key parameter changes on the firm's long run expected cost. Finally, we show that the optimal waste production level we seek is the solution to a specific cost minimization problem.

Keywords: Off Site, On Site, Optimal Waste Production, Storage, Uncertainty

JEL Classification: Q53, D81