In this paper we analyze the dynamic implications of recycling for resource use, the level of economic activity and the long-run development of the economy. In contrast to former approaches, we take explicit account of the circulation of matter in the economy. We consider virgin resources and recycled wastes as essential inputs to production. These material inputs either end up as waste after consumption or are bound in the capital stock-depending on the utilization of the produced output. As accumulating wastes can be recycled and again be employed in production, the waste stock serves as a source of valuable inputs in our model. We focus on the implications of recycling-related market failures and the integration of material balances on the dynamics of the economy. It is shown that a market for waste and subsidies to resource extractors and recycling firms can restore optimality in the decentralized economy.
