The Nature of the Circular Firm: A Professional Paper in Economic Theory and Circular Economy

This paper advances a microeconomic theory of the circular firm that explains how and when circular practices become rational under real constraints. Departing from the timeless optimizer of linear models, I posit circular firms as survival-oriented organizations that accept transitional inefficiencies to secure long-run viability. The theory (i) reframes inputs as stratified by lineage and quality, distinguishing first-order materials from second-order infrastructures and institutions; (ii) relocates transaction costs to the centre of analysis, expanding firm boundaries to co-create reverse flows; and (iii) specifies a temporal adoption path: entry, hybrid, maturity. Under which positive profit, credible learning curves, and liquid secondary input markets align. Treating waste as property and price as the carrier of continuity, the model identifies minimalist policy fulcrums (differential disposal pricing, property rights in residuals, lean standards) that allow market signals to internalize durability, recovery, and reuse. I integrate insights from evolutionary economics, transaction-cost theory, durable-goods strategy, and closed-loop operations to derive testable implications for firm design, market organization, and public policy. The result is the emergence of a tractable decision logic that moves CE from promise to practice for firms either looking to transition or enter markets as circular producers.