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This article describes the situation in which municipalities are responsible for selecting the instruments for downstream pricing of household waste disposal services – incentive pricing system or flat-rate tax–while at the same time a national regulator may be in a position to impose an upstream tax on the intrinsic waste content of products. The model incorporates the possibility that households may dispose of their waste illegally in order to avoid the incentive payments. The starting point of the analysis — which is realistic — is to assume that a number of municipalities will apply inefficient flat-rate taxes. In these circumstances, what constitutes an efficient national policy as regards upstream taxation? We show that it includes an upstream tax whose rate declines as the number of municipalities adopting an incentive payment system increases. Moreover, we establish the fact that failure to allocate the total receipts of the upstream tax to the municipalities leads to a distortion of their choices regarding pricing. Finally, we show that the illegal disposal of waste poses a problem of efficiency only when the incentive payment systems have been adopted by a sufficient number of municipalities.