In Chapter 4 we assumed a first-best economy in which there was no possibility of illegal disposal and showed how the social optimum could be attained by means of a DF policy, or a DR policy, or a TB policy, but because in the real economy illegal disposal is a real possibility, our final conclusion was that EPR policies are preferable to a DF policy. Now we move on to consider two factors that prevent the first-best outcomes, one being the transaction cost associated with a recycling subsidy (or refund), and the other being illegal disposal by the consumer. We shall see that the social optimum cannot be attained in such a second-best economy.2 Surprisingly, however, the three policies examined in Chapter 4 come up again as candidates for selection as the second-best policy: a DF policy, a DR policy, and a TB policy. In the next section we demonstrate that the first-best outcome can be achieved by various combinations of policies, including a disposal fee, a recycling subsidy, and an advance disposal fee. In Section 5.3 the second-best policy is characterized by the presence of two factors that stand in the way of the first-best optimum: illegal disposal and the transaction costs associated with a recycling subsidy.