Optimal policy design in the iron and steel recycling industry

Anoushiravan Farhangi, Purdue University

Abstract

In this study an analytical framework is developed to allow the policy makers in the recycling industry to determine the optimal set of policies to obtain a variety of objectives. The scrap iron and steel recycling industry is modeled as an oligopsonistic spatial price equilibrium. Each recycling firm within the industry is modeled as a cost minimizing follower, and the government is modeled as the policy leader. Within this framework, government's optimal policies under a variety of objectives is determined. Elaborate procedures are used to estimate local supplies and demands for scrap. Local demands for scrap are derived using pseudodata generated from a generic process model of the iron and steel industry. The plant level capacities and outputs are used to simulate the process model, and the scrap price is varied to determine the plant level demands for scrap. Furthermore, scrap generation is assumed to be proportional to population and industrial activity distribution. An estimate of the own price elasticity of scrap is then used to derive regional supply functions for scrap. In this study, the market for iron and steel scrap and the interactions by the policy maker are modeled as a bilevel programming problem. The general bilevel programming problem results when the objective function and the decision space of one agent are influenced by other agents. The bilevel programming problem is then reformulated as a single nonlinear complimentarity problem, and solved using a rapidly converging Newton type algorithm. The decision made by the NUCOR corporation to locate in Crawfordsville, Indiana is considered. The results indicate that Crawfordsville is the lowest cost location to NUCOR in the East North Central region, and subsidies by the government and the local electric utility may have been unnecessary. This study also shows that, in the short-run, subsidies are not a cost effective approach to increasing scrap use by the industry. It is unclear how much of this ineffectiveness is due to an inelastic demand for scrap as claimed by previous studies, and how much is due to the imperfect nature of the market, however, the imperfect market is a limiting factor to scrap usage by the industry.

Degree

Ph.D.

Advisors

Doering, Purdue University.

Subject Area

Economics

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