Wasting innovation - Barriers to entry and European regulation on waste electronic equipment

The European Directive on Waste Electric and Electronic Equipment 2002/96/EC distorts incentives in regulated markets. Treatment of ‘historical waste’—i.e. products sold prior to 13 August 2005—is financed by all firms in the market at the time of disposal. This stimulates excessive pre-regulation output by incumbents for two reasons: a costs sharing effect and entry deterrence. Entry deterrence is achieved by raising the common costs of waste disposal. Entry is a main driver of innovation in the affected industries. The feasibility of a first best policy is discussed and an alternative rule superior to the status quo is presented.