EU’s long-term objective is to become a recycling and resource effective society, where waste is utilized as a resource and waste generation is prevented. A system dynamics model was developed to analyze the policy mechanisms that promote packaging material efficiency in products through increased recycling rates. The model includes economic incentives such as packaging and landfill taxes combined with market mechanisms, behavioral aspects and ecological considerations in terms of material efficiency (the packaging material per product unit, recycled fraction in products). The paper presents the results of application of various policy instruments for increasing packaging material efficiency and recovery rate and reducing landfilled fraction. The results show that an effective policy instrument for increasing the material efficiency is a packaging tax. It ensures the decrease of the total consumption of materials and subsequent waste generation. The tax helps to counteract a rebound effect, which, as identified by the analysis, can be caused by reduced material costs due to eco-design. The model is applied to the case of Latvia. Yet, the elements and structure of the model developed are similar to waste management systems in many countries. By changing numeric values of certain parameters the model can be applied to analyze policy mechanisms in other countries.