Oct 8, 2025
In recent years, the concept of circular economy (CE), characterized by reduced resource use, waste, and their environmental impacts by closing the loops of energy and materials and extending the lifecycle of products circulating in the economy, has received significant attention from scholars, practitioners, and policy makers as an alternative paradigm to replace the dominant use-and-dispose linear economy, and facilitate a more sustainable development. CE is viewed as an essential feature of sustainability, with sustainable production and consumption — core principles of CE — being critical in every framing of the concept of sustainability included in the Sustainable Development Goals of the United Nations.
Recognizing the importance of the transition to a more CE, the relevant literature to date has focused primarily on methods and processes that facilitate circularity, approaching it as a technical and engineering challenge (i.e., system of processes) that prioritizes the production side of the economy. In particular, the core principles of the CE models are based on materials and energy flows aimed at reducing primary production, extending the life of materials and products already in circulation, and minimizing waste, while maximizing environmental benefits. This is achieved mainly through closing the loop and using waste from one process as an input in another process, creating new flows of inputs and outputs known as secondary production, such as recovered and recycled materials, waste, and byproducts.
However, as we point out in an article published in Circular Economy and Sustainability recently, while the development of effective processes is certainly necessary for increased circularity, it is not sufficient in ensuring the successful transition to a more circular economic system. Unless the adoption of these processes is viewed as beneficial/profitable for the interest groups involved, they may not be adopted in practice. Factors such as high costs, adverse impacts on quantity or/and quality of production, specialized knowledge or skill needs, uncertainty, and/or a negative consumer response may hinder the adoption of these processes and derail the transition to increased circularity.
In essence, a circular economic system is as much a system of markets as it is a system of material and energy flows. That is, for every secondary production associated with or resulting from circularity (e.g., recovered wastes and byproducts), there is a market with supply and demand conditions affecting the producers and consumers of the recovered secondary product in question, as well as other participants in the supply chain of interest and the economy at large. In this context, an understanding of the system-wide market and welfare impacts of circular economic processes, the economic costs and benefits associated with these processes, and other socioeconomic factors affecting their adoption and market acceptance and success is of paramount significance for (a) assessing their market potential and economic viability, (b) identifying areas where the potential for a market failure exists (i.e., areas where an incomplete internalization of the benefits of the increased circularity facilitated by the processes in question might result in the market forces failing to generate the socially desirable outcome/circularity), and (c) designing policies and strategies that can induce the socially desirable market outcome/level of circularity.
In addition to highlighting the need for an increased emphasis on the economics of the CE, the aforementioned research article had two additional objectives. The first objective was to develop a general framework that illustrates the transition from a linear to a circular economic system and the key areas involved in and affected by this transition. The second objective was to highlight the economic issues that arise during the transition to increased circularity and the policy options available to facilitate the successful transition to a more circular economic system.
Key Economic Issues Associated with the Transition to a Circular Economy
As noted earlier, the CE is as much a system of markets as it is a system of material and energy flows. That is, for each secondary production resulting from the transition to a CE/increased circularity, there is a market involving costs and benefits that impact the direct participants in this market/economic activity, as well as participants in other stages of the supply chain and, when recovered or secondary products are used in other supply chains, they affect participants in these supply chains as well. Changes in production functions/production technologies used; costs, quantity, and/or quality of production; consumer preferences; market structure, along with increased uncertainty and revenues from byproducts and waste utilized in a circular economic system; and benefits from corporate social responsibility are some of the economic issues associated with the transition from a linear to a CE.
Policy Implications
The economic costs and benefits associated with the transition from a linear to a circular economic system are important as they will determine the economic incentives for the adoption of the methods and processes that this transition requires. While the relevance and significance of each of these costs and benefits will vary with the sector and the idiosyncrasies of the processes and the products involved, the relationship between the expected costs and benefits will determine the success of the transition to circularity. And since there is not only one way of transitioning to a circular economic system, the relevant costs and benefits will also determine the economically optimal path to circularity for those involved. While many participants in the supply channels of interest value the socioeconomic and environmental benefits associated with increased circularity, the key objective of rational firms is the maximization of their profits. In this context, the relationship between the economic costs and benefits associated with the transition from a linear to a circular economic system is of paramount significance for the successful, effective, and efficient transition to increased circularity.
Apparently, when the expected benefits outweigh the expected costs of such transition for all relevant parties involved, rational decision makers can be expected to adopt the methods and processes required by the CE. No policy action is required in this case as the market forces facilitate the socially desirable transition to the CE.
The need for policy intervention will arise, however, when the balance of the expected costs and benefits is such that the methods and processes required for the transition to the socially desirable circular economic system are not adopted by the relevant supply chain participants. This can occur when the expected costs outweigh the expected benefits of those involved and/or when the supply chain participants do not consider or internalize the socioeconomic and environmental benefits of increased circularity, which creates a difference between the private and the social benefits of circularity and a market failure to generate the socially desirable outcome.
Effective policies, in this case, are 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 (adoption of the methods and processes that lead to the transition to a circular economic system, in our case). In this context, if the problem lied with high costs of establishing the CE units and producing the secondary products, the government could address it through the provision of subsidies designed to reduce these costs to a level where the transition to circularity would become profitable for the decision makers involved. Properly designed subsidies could also address issues with reduced production or/and reduced quality of output due to the use of secondary products, while issues with increased producer uncertainty and/or low consumer valuation of CE products could be addressed through the provision of relevant information on the methods, processes, and the benefits of increased circularity. Such 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 (and address the market failure that such discrepancy can create). While the policy tools for inducing the desired outcome(s) exist, a clear understanding of the economics of the transition to CE in a supply chain is essential for determining whether a policy intervention is needed and, if so, what form it should take.
Reference:
Chennak A., K. Giannakas, T. Awada. “On the Economics of the Transition to a Circular Economy.” Circular Economy and Sustainability (2023). https://doi.org/10.1007/s43615-023-00297-8.
Dr. Ahmed Chennak
Research Assistant Professor
Oak Ridge Innovation Institute
University of Tennessee
achennak@utk.edu
Dr. Konstantinos Giannakas
Harold W. Eberhard Distinguished Professor
Department of Agricultural Economics
University of Nebraska-Lincoln
kgiannakas@unl.edu
Dr. Tala Awada
Associate Dean
Agricultural Research Division
Professor
School of Natural Resources
University of Nebraska-Lincoln
tawada@unl.edu