Price Setting for Green Design

H. Scott Matthews and Lester B. Lave, Green Design Initiative, Carnegie Mellon University

Introduction

Industrial ecology says that economics can be thought of in ecological terms. The output from one process is the input to another process. Industrial societies face increasing problems with disposing of waste, particularly hazardous waste. At the same time, industrial societies are concerned about running out of raw materials in the future. The current industrial structure sells products to consumers who ultimately transform them into waste to be disposed of. Reuse, remanufacture, and recycling requires a more extensive interaction between consumer and producer than currently exists. New market structure is required to accommodate this interaction.

A model quantifying the benefits of green engineering must examine a pair of major issues regarding product "greenness". First, it must estimate the benefits of incorporating reuse, remanufacturing, and recycling into the design of a green product. Second, it must quantify the conditions under which green practices become profitable.

Life Cycle Modeling of Manufacturing

Green products by design can have their components or entire assemblies used more than once. This figure represents goods in an industrial economy where the alternatives of reuse, remanufacturing, and recycling are all plausible given the economic conditions.

Without disposal, this model would fit the industrial ecology ideal; if disposal is reduced, there should be some gains in pollution prevention and green design.

Manufacturers can alter the fate of a product, from disposal to reuse, repair, remanufacturing, or recycling by altering design, choice of materials, quality of manufacturing, and the terms of sale. Since manufacturers presently do not bear disposal cost and do not have access to the product after consumer use, there is little or no incentive to design products for reuse rather than disposal. This paper considers the effect of incorporating disposal costs in a green product.

The Model

The model has two components of product cost (Ci): initial manufacturing cost Mi and turnaround cost Ti. The initial cost of manufacturing is M1. In each period after initial manufacture, the manufacturing cost is (1 - k)M1, where k might be thought of as the proportion of a product's components that can be reused (0 <= k <= 1).

Under these assumptions the costs can be written:

C1 = M1

Ci = (1-k)M1 + T

Within this model, a perfectly reusable product is characterized by k = 1 (all components reusable). The quality of design, choice of materials, quality of manufacturing, and number of uses determine the value of k.

Consider a remanufactured product such as a laser printer toner cartridge. Most of the expensive components can be reused at little cost. This table shows a schedule of costs for such a product, assuming that k = 0.7 (70% reusable), initial manufacturing cost M1 = 40, turnaround cost T = 2, and number of uses n = 20. The model also considers the cost of waste generated at each use, as well as the (potentially toxic) disposal cost at the end of its life. The optimal price given these conditions is also shown.

Use	Man Cost	Turn Cost	Use Disp	End Disp	End Toxic	Cost(i)	Life Cost	Price
1	40	0	0	0	0	40	40	40
2	12	2	3.6	0	0	17.6	57.6	28.8
3	12	2	3.6	0	0	17.6	75.2	25.1
4	12	2	3.6	0	0	17.6	92.8	23.2
5	12	2	3.6	0	0	17.6	110.4	22.1
10	12	2	3.6	0	0	17.6	198.4	19.8
20	12	2	3.6	0	0	17.6	374.4	18.7
End	0	2	0	5	7	14	388.4	19.4

Conclusions

This model serves several purposes. First of all, it creates a generalized system for accounting for costs in a manufacturing setting. It further supports the lifecycle nature of a green product and shows the optimal price for all cases.

Finally, the model accounts for the inclusion of disposal costs of a product over its lifetime and generalizes new optimal solutions based on these additional costs. Extensions of the basic model also provide strong tools to designers to see exactly what the tradeoffs in this system are between increased lifetime costs and product price.

For more information contact

H. Scott Matthews / Lester B. Lave
Phone: (412) 268-6218 / (412) 268-8837
E-mail: hsm@cmu.edu / lave@cmu.edu

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