Incremental optical encoders can be quite expensive...commercially available units from US Digital can go from $7 USD (mylar encoder disk) and $50 USD (encased encoder). Taking apart the ubiquitous $5 PC mouse, however, can give you two cheap but quite reliable encoders plus two infrared (IR) emitter-detector pairs. This tutorial will show you how to take apart a mouse, remove these parts and protoboard your own quadrature encoder in an afternoon or two. Link.
Hacking a mouse for encoders