Urban waste management is one of the primary challenges faced by municipalities, especially in cities where informal flows play a significant role in the collection and recycling processes. This study aims to enhance the efficiency of the urban waste management system in Kerman by proposing a Causal Loop Diagram (CLD) model that focuses on the convergence of formal and informal cycles and the development of recycling industries. In the proposed model, the addition of recycling units such as aluminum, PET, plastic, and nylon recycling, alongside municipal recycling booths, increases the system's flexibility and creates economic added value. Moreover, through financial incentives, such as issuing permits and associated discounts, the model allows for the integration of informal waste collectors into the formal cycle, leading to increased municipal revenue from recycling and improved oversight of the waste collection and disposal processes. The results indicate that this model not only reduces the municipality's waste management costs but also contributes to urban sustainability by increasing informal collectors' cooperation and enhancing monitoring. Furthermore, recycling industries, as a critical part of the waste management chain, have the potential to convert raw waste into higher-value industrial materials, thereby boosting the system's economic and environmental efficiency. This model can serve as a blueprint for other cities facing similar challenges. Consequently, the present study offers an innovative approach, making strides toward the improvement and sustainability of urban waste management, which can enhance the efficiency and mitigate the problems of traditional waste management systems in Iran.