This article incorporates an environmental dimension into the study of markets characterised by producers of a primary good in a position of market power over a sector of recycling. In the model used, production of the primary good by a monopolistic firm is polluting, whereas production of the recycled good is not. Taxing the monopolistic firm allows to reduce pollution, at the price of a reduction in the total quantity of good produced. The effect of a subsidy for recycling depends on the slopes of the demand curve and of the recycler’s supply curve. It is ambiguous in terms of welfare, but it always encourages recycling.
JEL Classification: D42; D62; H23; Q53.

Publisher keywords: environmental externalities, environmental policy, market power, recycling