The economic costs and benefits of a transition to circularity are important as they will determine the incentives or disincentives for a transition to circularity. This relationship between expected costs and benefits will determine the degree of success involved in the transition, even though the relevance and significance of each will depend on the sector and peculiarities of the process and the products involved.
Furthermore, since we are not constrained to a single transitional strategy, the costs and benefits will also be critical to determining the optimal path to circularity.
More than being simply useful for determining an optimal route to transitioning to a circular economy, the costs and benefits of the transition are paramount in the successful, efficient, and effective transition to increased circularity.
Businesses may be interested in the socioeconomic and environmental benefits of a transition, but it is unlikely they will be as motivated, if at all, on the same level as profit incentives, as the key objective of a rational firm is the maximization of their profits.
For example, if the expected costs of a transition are outweighed by the expected benefits, there would be no requirement for policy action or intervention, as market forces would facilitate a socially desirable transition to CE.
There is a need for policy intervention if the relative balance of expected costs and benefits is such that the methods and processes required to transition to a circular system are not adopted by the relative supply chain participants. This can occur if the costs outweigh the expected benefits and/or if the socioeconomic and environmental benefits are not recognized or internalized by supply chain participants. The latter scenario creates a difference between the private and social benefits of circularity and a market failure to generate the socially desirable outcome.
Therefore, effective policies would be, in this case, those that address the source of the problem and change the relationship between the expected costs and benefits to induce the desired behavior of the relevant parties involved – in our case, adoption of methods that and processes that would lead to the transition to a circular economic system.
In this context, if the problem was due to the high costs of establishing the CE units and producing secondary products, the government could address this by providing subsidies designed to reduce the costs to a level where a transition would become profitable for the decision-makers involved. Subsidies, if designed properly, could also address issues with reduced production or reduced quality output that can come with the use of secondary products.
Issues with increased producer uncertainty or low consumer valuation of products produced through CE can be addressed through the provision of relevant information on the methods, processes, and benefits of increased circularity. This information could also enhance the producer valuation of the circular economic system and reduce an existing discrepancy between the social and private benefits of increased circularity – addressing the market failure that such a discrepancy can create.
The policy tools for inducing the desired outcomes exist, so a clear understanding of the economics of the transition to CE in a supply chain is essential to determining whether a policy intervention is needed and what forms it could take.