The joint tax-subsidy mechanism incorporating extended producer responsibility in a manufacturing-recycling system

Abstract The joint tax-subsidy policy is a typical form to implement the Extended Producer Responsibility (EPR) in several countries and cities. An understanding of EPR implementation mechanisms can help governments to impose proper taxes and subsidies which can further incubate ecological and environment-friendly manufacturing-recycling systems. This paper aims to investigate the joint tax-subsidy mechanism using game theory by considering a manufacturing-recycling system consisting of a government, a manufacturer, and a recycler. Results show that such joint tax-subsidy mechanism can motivate the manufacturer to pursue eco-innovation and to incorporate the recycling considerations into its production and eco-innovation decisions. The mechanism can reinforce the benefit of the eco-innovation to the manufacturer by adding revenue to the recycler, because higher revenue to the recycler leads to higher production quantity of the manufacturer. Eco-innovation factors and recycling factors that define the backgrounds of mechanism implementation are identified, managerial insights for governments into how to change the mechanism in response to different backgrounds are provided. This study provides a guideline for the government to design the joint tax-subsidy mechanism and a reference for firms to effectively fulfill their environmental responsibility.