Looking for lower cost incremental encoder

If the max diameter where the sensor can be located is 7", then the circumference at that point is 22", and at 1024 pulses per rev, the reflector stripe (I see a alternating pattern of reflector and dark stripes) would be 0.021", which I believe would require a laser to detect don't you think? So for a normal optical tx and rx pair, maybe 0.1 resolution could be achieved which would require maybe 5 sensors, and a reflector stripe width of 0.1".... right?

I do like the one side assembly idea...that is the right way to go...

Speed might be another factor, some of the optical assemblies aren't optimized for high speed. 6000 rpm = 100Hz. You might check into the sensors used for optical mice. Volume makes the price reasonable and they may be adaptable for the purpose.