This study presents a Stackelberg-typed model to determine the socially optimal subsidy and advanced recycling fees in decentralized reverse supply chains where each entity independently acts according to its own interests. Our model consists of the government, as a leader, and two followers, a group of manufacturers, importers, and sellers (MIS), and a group of recyclers. Two-part instrument (2PI), where the government taxes manufacturers, imports, and sellers (MIS) and subsidizes recyclers, plays a key role in driving or giving incentives to the flows of recycling items. The current recycling system in Taiwan considers the fund balance between the subsidy and advanced recycling fees. This study maximizes the profit of the whole system, and the government determines the advanced recycling fee paid by the MIS and the subsidy fee subsidizing recyclers when MIS firms sell or recyclers process a unit of products. This study investigates the difference in the interested performances of the system optimization model and current practice under the identical tax revenue, and draws the managerial insights by examining numerical examples in the personal computer industry in Taiwan. This research makes two important contributions to the literature: (1) the proposed concept of system maximization providing the EPA with a different tax/subsidy instrument, (2) quantifying the possible relationship between the subsidy fee and collected quantities, which demonstrates a market distortion in the current practice of the fund balance model.

recycle;Subsidy fee;Advanced recycling fee