Externalities and Misaligned Incentives in Sustainable Solid Waste Management: An Economic Theory Perspective for Policy Design in Brazil

The successful implementation of Brazil’s National Solid Waste Plan depends on identifying municipal solid waste management strategies that are both environmentally effective and fiscally realistic for replication at scale. This study develops and tests a multidimensional framework that evaluates the performance of Brazilian municipalities across five indicators: environmental recovery quality (Y1), social coverage (Y2), economic cost efficiency (Y3), and two cost-composite indicators (Y4, Y5). The framework is grounded in the recognition that municipal solid waste management involves significant market failures—natural monopoly conditions on the supply side, and negative externalities from improper disposal alongside positive externalities from material recovery—which make single-dimension cost minimization an insufficient performance criterion. Using multivariate regression analysis on a sample of 394 municipalities drawn from the National Sanitation Information System, the study identifies factors associated with performance across all five dimensions and finds that cross-indicator sign reversals are consistent with the presence of misaligned incentives: logistical decisions and contractual structures that appear efficient at the service level generate costs in the recovery chain that are not internalized by operators. Municipalities were stratified into five recovery bands (A–E); those in Bands B–D perform significantly above the national average in material recovery while achieving cost–benefit indicators realistic enough for broader replication, making them the most strategically relevant reference group for national policy learning. The findings suggest that performance improvements are more strongly associated with the quality and targeting of expenditure than with aggregate spending levels, and that incentive-aligned contracts, quality-preserving logistics, and structured inclusion of organized waste pickers represent complementary instruments for internalizing the social value of material recovery. These results offer a foundation for evidence-based policy design under the National Solid Waste Policy frameworks.