Why Incorporating the Taxation on Remanufactured Products May Not Make the World Better?

Abstract

Remanufacturing reduces the consumptions of energy and raw materials while causing damage to the environment in the process of raw materials extraction, production, use, recycling, and disposal. Some regulators encourage the firms to remanufacture, and the others levy environmental tax (such as carbon tax) to make the firms internalize environmental cost. Thus, the effect of incorporating the taxation on remanufactured products on the world needs to be examined. This paper mainly explores the situations where incorporating tax on remanufactured products may not make the world better in the context of triple bottom line thinking (namely, economic, environment, and social welfare). Using a Stackelberg game model for two cases with and without tax on remanufactured products, we first characterize the optimal solutions for the manufacturer and analyze the effects of imposing tax on remanufactured products on production, economy, and environment. Our analysis shows that incorporating the tax on remanufactured products can mitigate the cannibalization of remanufactured products and promote the demand for new products in low tax interval. If the tax price is low and consumers consider that the remanufactured product is environment-friendly enough, incorporating the tax on remanufactured products brings a 'lose-lose' situation where the economic and environmental performances of the manufacturer are simultaneously damaged. This warns the regulators that there is no need to impose tax on remanufactured products when the environmental awareness of consumers is strong enough under the low-tax price. From the social welfare perspective, we determine the optimal tax price level and discuss the situation where incorporating tax on remanufactured products makes the welfare worse.