Jesse is attending a camp focused on people trying to correct their lives after heavy use of drugs or alcohol. Fed up, he questions if the group leader had every really hurt someone. The group leader shares his experience of killing his daughter after getting drunk. He lived in a state with an ABC (Alcoholic Beverage Control) store that closed at 5 PM. Some states regulate the sale of alcohol in attempts to limit its consumption, but this can have unintended consequences. Because alcohol is not readily available, some consumers purchase more than they might need. The group leader admits to doing so, drinking too much, and then killing his daughter.
Waiting for Walter to get to the facility, Jesse decides to goof off. When employees aren’t being monitored, there may be an incentive for those employees to shirk (goof off) while still being paid. If firms pay efficiency wages, that may incentivize some workers to avoid shirking, but it’s not always guaranteed.
Back in the office of Saul Goodman, Walter and Jesse try to sort out some of their recent misunderstandings. In the process, Jesse finds out that Walter is soon to start producing methamphetamine without him and under the employment of their associate, Gus Fring. When Walter is asked about how much he stands to gain from this new partnership, he simply responds, “It is $3 million, for three months of my time.” Saul knows that this large amount of money needs to be laundered and immediately offers his services for a 15% fee. However, as a prospective customer for money-laundering services, Walter is well aware of his bargaining power and quickly counters Saul’s offer with a 5% fee. Saul attempts to negotiate a high-enough fee by sequentially proposing 14%, 13%, 12%, and 10% fees. In each scenario, Walter’s response is unchanged, “5%”. Single buyers, or monopsonists, have the market power to reduce the acquisition price, just as a monopolist has the market power to limit the quantity supplied and therefore increase market price to maximize profits.
This video clip is also instructive about the price elasticity of supply. More specifically, the video clip emphasizes Saul’s perfectly inelastic supply for money-laundering services over the observed range of prices (i.e., 5% to 15%). Despite the fact that the laundering fee (the price Saul receives) is adjusted from 15%, 14%, 13%, 12%, to 10%, and finally to 5%, Saul is still willing to supply his services. The negotiation between Walter and Saul also reveals some information about Saul’s “willingness to supply”, which seems to be somewhere under or at the 5% threshold. This is simply because even at 5%, Saul accepts the proposal.
Finally yet importantly, the dialogue between Jesse and Walter, located the end of the episode and included below, may be used to frame a discussion about contracts, contract enforcement, and the role of institutions in shaping the behavior of economic agents. Jesse: “You think that this will stop me from cooking?” Walter: “Cook whatever you like. As long as it’s that ridiculous Chili P or some other dreck … but don’t even think about using my formula.” Jesse: “Just try and stop me!” While Walter is indeed the one who discovered the formula for the “blue” methamphetamine, he might have a hard time preventing Jesse from using the same formula to produce a similar good. Had this formula involved any other legal product, such a dispute would have been prevented by the filing of a patent or by a contract regarding its use, both enforceable through a functioning judicial system. However, the use of institutions as a dispute-settling mechanism is not possible in this case – methamphetamine is an illegal good, produced and consumed within a black market. Consequently, violence and the use of force tend to replace institutions in solving such issues, a substitution that generates significant external costs to society.
This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)
See more: bargaining power, consumer surplus, contract enforcement, contracts, demand, dispute resolution, elasticity of supply, institutions, market power, monopsony, producer surplus, supply, transaction costs, willingness to pay, willingness to sell
After having the family car repaired at a local maintenance shop, Walt decides its time to get rid of it. He’s worried that his car is too easily recognized and offers to sell it to the shopkeeper for $50. While Walt Jr. finds this crazy, Walter is willing to get rid of it even if it’s well below what he could get somewhere else.
In addition to depicting the underground market for firearms, this clip is also useful to spark a discussion about gun control policies. Walter could purchase a gun legally since he doesn’t have a criminal record, but he’s willing to purchase an illegal one without a serial number.
The scene brings forward a discussion between Jesse and Walter. Their dialogue is centered on how their competitors choose to protect their turf and the shooting of their partner Combo, for which Jesse seeks revenge. The scenes within are particularly useful for discussing the importance of property rights delivered by a functioning legal system and the consequences brought about by the impossibility of enforcement, for instance, in the black markets for drugs. For example, when Combo sells “blue” methamphetamine in the competitors’ turf he ends up being killed by an 11- year old boy. The rival gang seizes and sells the “blue” methamphetamine, distributed by Combo and cooked by Walter and Jesse, as their own. Outside of black markets, courts or specialized branches of the police would have handled such disputes. However, when the rule of law and property rights are absent, vaguely defined, or not enforceable, agents resort to other means of enforcement such as violence, which breeds more violence – Jesse is obviously seeking revenge for Combo’s death.
The clip is also useful for illustrating the socio-economic costs and the unintended consequences of illegal drugs and the black markets that form in response. The loss of life and the use of children, often from poor neighborhoods and low-income families, as labor are obvious. A discussion about social mobility and human capital development may also originate within these scenes. In broad terms, children who end up dealing drugs and protecting turfs fail to accumulate the much-needed human capital, which should allow them to fare better than their parents. The scenes within may also be used to discuss how failure to accumulate human capital or make meaningful investments in tomorrow’s labor force diminishes a jurisdiction’s ability to produce goods and services, or, in other words, shifts that jurisdiction’s production possibility frontier inward.
This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)
See more: black markets, contract enforcement, dispute resolution, human capital, illegal drugs, institutions, judicial system, monopolistic competition, poverty, restricted opportunity, social mobility, unintended consequences
Gus is set on controlling the market for meth in the Southwest. He has worked hard to eliminate the local drug cartel so that he can be the sole supplier. Being the only supplier of a product gives a firm market power to charge prices greater than marginal cost. While profit maximization still occurs where marginal cost equals marginal revenue, a firm with market power is able to charge a markup on top of the marginal cost. Further, the markup is inversely proportional with the price elasticity of demand coefficient (i.e. the more inelastic the demand, the higher the markup). As the number of substitutes (competitors) decreases, the demand for each firm becomes more inelastic, which, in turn allows the firm to charger higher prices.
There’s a fly in the facility and Walter doesn’t want to proceed until the fly is dealt with. Walter doesn’t want to contaminate the product in any way, but Jesse is confused because the customers don’t care about the quality of the product. If a small fly lands in the batch, Jesse believes it won’t be that big of a deal because the customers are highly inelastic. Jesse cites other examples of contamination in food (like hot dogs and candy bars) where people (and the government) don’t care about the quality.
Skyler starts doing the books for Walter’s drug income and is ready to learn how the money gets laundered. She doesn’t think Saul’s setup is legitimate enough to get past the IRS so she wants to talk to him directly. It turns out that Saul’s ideas seem ludicrous to her. One unintended consequence of policies that outlaw the production/distribution/consumption of drugs is the creation of money-laundering operations such as “Ice Station Zebra Associates”. Walter uses this “company” to launder the money he earns from manufacturing methamphetamine.
When employees have the ability to shirk or steal, firms may invest in monitoring devices to ensure against theft. In the lab, Walter supervises Jesse, but their employer monitors both Walter and Jesse as they work. Hypothetically the guard may be paid a handsome salary to disincentivize him from cheating his employer.
Walter and Skyler are in the market for a new house. Walter is attempting to maximize his utility by proposing to Skyler a larger house instead. In other words, Walter is trying to move onto a higher indifference curve. However, their limited budget represents a constraint to Walter’s utility maximization problem.
The price system motivates Gus to purchase the equipment for the chemistry lab, hire the resources needed and take the risk to produce and distribute the methamphetamine. Gale is shocked by the investment, but profit motives are often used as the incentive for investments. Firms only invest in resources if they believe they can lower the cost of production (given a fixed output) or to increase production either of which would increase profits.
Gale is asked to test the purity of Walt’s meth and finds that it’s 99% pure, while he can only produce a version that is 96% pure. From Fring’s standpoint, 96% is good enough, but Gale is impressed that another chemist can achieve a 99% purity level. It is apparent that Gus weighs the costs and benefits of producing 99%- or 96%- pure methamphetamine. After all, the equipment he just purchased is suited for producing both purities, which makes the two varieties substitutes in production. Nevertheless, Gus decides that a purity of 96% will suffice. From his perspective, the cost of working with Walter, who is regarded as unprofessional, outweighs the 3-percentage points increase in the purity of the drug. However, Gus’ methamphetamine, although 96% pure, is inferior to that of Walter and the logic of the Alchain-Allen theorem tells us that he might be losing out as long as it competes with the “blue” drug. In other words, the Alchian-Allen theorem states that, when the same transportation, distribution, tax, or sale-specific markup is added to the prices of two similar varieties of the same product, the relative consumption of the higher quality good will increase. Since from a legal perspective, the risks and costs of distributing methamphetamine are, more or less, the same, regardless of its purity, a relatively larger market share will be accounted by Walter’s “blue” methamphetamine. The scenes within the video clip are also useful for discussing product differentiation as a key characteristic of monopolistically competitive markets. The blue color of Walter’s methamphetamine represents a signal of quality as well as purity that bridges the seller- buyer information gap, a problem that plagues black markets such as those for drugs and other illicit goods or services.
This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)
See more: Alchian Allen Effect, cross-price elasticity, demand, diminishing returns, elasticity of demand, marginal benefit, marginal cost, monopolistic competition, potency effect, product differentiation, substitutes
As the party unfolds, Badger orders a pizza from a special venue, which charges lower prices by not slices their pies. Jesse is not at all impressed by this sales approach and, in fact, is a bit irritated. Nevertheless, Badger attempts to link the resources spared by doing away with the pizza-cutting process and the savings passed onto the consumers. While this approach implies significant resource savings on a larger scale, the benefits may not outweigh the costs on an individual (i.e., consumer-by-consumer) basis.
Skyler gets Bogdan to sell his car wash under an elaborate ruse where it appears he is contaminating the local groundwater. While the company isn’t actually polluting the groundwater, companies that contaminate groundwater are imposing external costs on society and are not accurately accounting for that cost in their pricing. While the optimal amount of groundwater pollution probably isn’t zero, with negative externalities, firms are overproducing. Governments often take a command-and-control approach to some forms of regulation and insist that companies pay steep fines for violations.
Hank is temporarily disabled and has been collecting rocks to pass the time. Walt Jr. and Hank are both impressed with a pink rock, which Walt goes on to describe why the rock gives it that color. This is a good example of a positive statement, which is a testable statement that has a right or wrong answer. It is not based on some value judgement (like the rock looking cool).
Walter tries operating the facility by himself and he’s struggling to move a barrel with Jesse gone. Normally, the two would work together to specialize in particular tasks to reach their intended goal. Having only one worker means that they aren’t able to gain from specialization.
In an attempt to get Walt Jr to like him again, Walter tries to buy him a used car. Recognizing that his dad is trying to purchase his approval, he convinces his dad to buy him a new sports car instead. This clip shows Walter’s willingness to pay for his son’s happiness.
Mike and Jesse need to get in touch with a dubious individual, who currently lives in a blocked off house. Mike’s plan is to wait until the person comes out of the house on his own. However, Jesse thinks he can speed up the process. After he fails to talk the person out of the house, he starts digging a hole in the front yard. Very soon after, the individual comes out and asks Jesse if he can continue digging instead. This account emphasizes that Jesse has skills that Mike does not, and, therefore, he can contribute to the success of the daily operations.
Walter brings in the first batch of money for Skyler to launder, but she’s shocked by the amount coming in. Walter brings in $274,000 for her to get through the system, but she quickly realizes he’s earning millions of dollars each year, which is far more than what she can reasonable hide in a car wash. Both are frustrated because they have specialized in their own part of the operation and can’t control the other portions of the setup
Gus and Mike have both been shot. However, the personnel at temporary medical facility they found themselves in only focus on saving Gus. Jesse is frustrated by this because Mike and he are very close. Nevertheless, the doctor points out that Gus is the priority because he is the one paying his salary. This is also visible in our current medical system. Specifically, those who have the ability to pay often receive priority and extra-quality healthcare, which may not be equitable, but may be, perhaps, efficient.
Gus and his people leave the meeting at the hospital with Jesse and head back to their car in the parking garage. As they approach the car, Gus stops and begins to look around at the rooftops around the garage. Walter is on a nearby rooftop and hides as Gus stands right across from him waiting and thinking. He decides to abandon his car, as he fears it may be a trap.
Skyler decides to force Ted, her previous employer, to pay his outstanding debt to the IRS. Huell and Patrick visit Ted and strong arm him into writing a check for those back taxes. After signing the check and seeming to cooperate, he decides to make a run for it instead. He takes off running, slips on his rug, and slams head first into his cabinet breaking his neck.
Gus Fring confuses the DEA chief, George Merkert, because when he invited him over to his house and Fring seemed like a good person. However, it turns out that people can hide who they really are and appear to be what others want them to be. Fring knew the entire time that he was manufacturing large quantities of methamphetamine and yet he was having dinner with his potential captor. This clip represents a starting point for a discussion about asymmetric information, which occurs when one party holds relatively more information about an exchanged good.
Lydia comes to see Mike and is less than impressed with the diner’s tea selections. She goes through a variety of different drink options and then settles on just having hot water and lemon, which she values over Lipton (black) tea. Consumer theory requires that consumers should be able to rank their preferences, which Lydia clearly does in this scene.
Walter, Jesse, and Mike and splitting the proceeds from a new, methamphetamine-production business. The scene demonstrates how businesses incur various expenses while providing instructors and students with a lively example about the different cost types. Once Mike divided the revenue into three equal stacks, he goes on to do an accounting of all the costs they have incurred while producing their latest batch. One can observe that some the costs such as the ongoing expense with keeping former collaborators quiet are fixed, while others, such as the cut to the dealers or the fee for the drug mules (i.e., those who transport the methamphetamine from its production to distribution location) are variable. Actually seeing each pile of cash shrinks, as they account for the costs of the business, provides a visceral example about costs, profit, and the relationship between the two.
This clip may also serve as a catalyst for discussing, once again, the role of institutions in shaping the behavior of economic agents and the consequences brought about by their lack of reach into black markets such as that for methamphetamine. Walter is surprised to find out that the cost with the mules is 20% of the revenue. However, Mike adds that transporting the methamphetamine involves risks (i.e., of being robbed by a rival gang or being caught by the police and sent to jail) and the cost is justified – in economics jargon, such costs represent the compensating differential for hazardous work conditions. Outside black markets, a robbery is solved by simply reaching out to the police or other specialized authorities. In other words, property rights may be enforced through the judicial system. However, in the case of methamphetamine this is not possible. This way, those who move the drug must also guard it and enforce the property rights over it through violence. Hence, the steep cost of transportation that characterizes the methamphetamine-producing business.
This clip also provides a detailed account of various activities that form the underground economy and underpin the $1,392,800, methamphetamine business. For example, dealers receive $13,240, mules (the ones who transport the methamphetamine for distribution purposes) get a flat 20% (after the dealers have been paid) or about $278,560, miscellaneous production-related expenses total $120,000, expenses with concealing the laboratory add up to $165,000, while the lawyer/money-laundering fees are $54,000. As part of the methamphetamine production, all these activities are illegal, thus not recorded officially, and hence part of the underground economy. The figures associated with such activities may find their way into official data, however, as fictional activities/services conjured by money launderers. This illustrates once more the difficulty that arises from accurately measuring the volume of the economy be it as the gross domestic or gross national product.
This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)
See more: accounting, black markets, compensating differential, dispute resolution, fixed costs, fixed inputs, gross domestic product, institutions, judicial system, money laundering, profit, property rights, revenue, risk premium, total costs, transaction costs, underground economy, variable costs, variable inputs
After running out of their primary ingredient, Mike suggests that they go back to producing using pseudoephedrine. Walter quickly points on that their equipment isn’t designed for this and it will reduce their yield significantly. Mike argues that the alternative is not making anything at all and that making some product is better than making no product at all. This scene serves as a nice example of why firms may operate at a loss rather than shut down. As long as the price of the product is greater than average variable costs, firms will operate in the short run.
After a failed first attempt to gain full control over a key production input and get the blue methamphetamine off the market, Declan, a Phoenix-based dealer, meets with Jesse, Mike, and Walter. Right from the start, Walter tries and appears to succeed in convincing Declan that collaboration is the best path forward. This way, Walter’s superior blue methamphetamine remains in production and the methylamine, the key input, is used in the most efficient and profitable way. Further, Declan and his crew would serve as their distributor. This way the parties specialize according to their comparative advantage while all parties economize and gain from trade.
See more: barriers to entry, black markets, collusion, comparative advantage, efficiency, elasticity of demand, elasticity of supply, inputs, mergers, monopolistic competition, monopoly, oligopoly, quality, substitutes
Mike and Jesse attempt to get out o
Mike and Jesse attempt to get out of the business of producing the blue methamphetamine. In doing so, they attempt to sell their share of the methylamine, a key input in the production of methamphetamine, to Declan, a competitor from Phoenix. However, the Phoenix producer wants it all, theirs and Walter’s. This way he can control the entire market for methamphetamine. Because he knows that he can reproduce a similar product, he recognizes that having all thousand gallons would make it so that Walter couldn’t be competition in the market. Having control of the market will give this producer monopoly power, which will allow him to be even more profitable. Controlling a scarce resources is a common way that monopolies create barriers to entry in a market, resulting in the market power.
Lydia presents Walter with the opportunity of expanding into a new market (the Czech Republic). Lydia goes further and points out that entry should not be difficult given Walter’s high-purity “blue” methamphetamine and the inferior alternatives available there. Also, it is worth noting that such overseas expansion would not have been possible without Lydia’s expertise regarding global supply chains.
See more: comparative advantage, demand, elasticity of demand, elasticity of supply, expansion, exports, intra-firm trade, market entry, middleman, monopolistic competition, multinational enterprise, opportunity cost, product differentiation, trade barriers, transaction costs
This clip represents a wonderful account of all the moving parts of Walter’s methamphetamine enterprise. Walter and Jesse cook, Lydia arranges and oversees the international shipments of methamphetamine, which are disguised as shipments of various chemicals between the subsidiaries of the multinational enterprise she works for, Todd coordinates the transportation operations, and Skyler is in charge of accounting and money laundering. Here, the division of labor and the comparative-advantage based specialization is what makes their enterprise successful. If one or two individuals tried to run the same operation (like when it was just Jesse and Walter), they would not be able to produce as efficiently. The downward sloping portion of the average total cost curve is the area where the benefits of specialization outweigh diminishing returns from adding additional workers.
Skyler takes Walter to a storage area she has rented and shows him the giant pile of money he has made from his meth business. She then asks him “How much is enough? How big does the pile have to be?” Walter appears to have the same determination to earning revenue, but Skyler recognizes that her utility has diminished. The first thousands that Walter brought in may have excited her, but at this point it has become a hassle and it doesn’t seem like another dollar will really change her happiness level.
Walter stops by to see Jesse. Reminiscing about the start of their partnership, they cannot help but wonder about sticking with the old recreational vehicle (RV) even when there was enough to replace it. While the RV served them well in their first attempts to cook methamphetamine, the two did not upgrade until they started working for Gus Fring. The ownership/endowment effect underlines the scenario in which some people are unwilling to exchange something that they possess for the same amount of money that they would pay for it (if not owning it). Walter and Jesse loved the RV even though it had, and brought them, many problems. From a rationality standpoint, they may have been too concerned with the sunk costs that they have incurred.
Huell and Patrick are sent to get Walter’s giant pile of money. Upon seeing it Huell and Patrick cannot resist the urge to lay on top of it. Huell suggests that they skip town with the money but Patrick points out that Walter had ten men killed, in prison, all within a two-minute window. While there’s only so much money the two can pack away, is there a threshold that would have induced the two of them to try and run away?
See more: cost benefit analysis
Jesse beats Saul and forces him to confess at gunpoint about helping Walter to poison the son of his (Jesse’s) former girlfriend. In the moment, Saul needs to make a decision. He can lie to Jesse and play dumb, but he risks getting shot because of Jesse’s anger. On the other hand, he could tell Jesse the truth, confess to aiding Walter, and Jesse could still shoot him because he’s so angry. Either way, Saul must weigh the probability of being shot from telling the truth or from lying.
Todd cooks a methamphetamine batch of only 76% purity and not the distinct blue color expected by European customers. Lydia comments that consumers expect the “blue”, which is a signal of quality and purity, and will pay top dollar only for it. So while even though they are getting better, they aren’t as good as Walter’s blue meth. The blue coloring is important to signal to the European market that the product is high quality (even though it isn’t). If customers believe the meth is the same, they will pay top dollar for the product. Lydia recognizes that without the color, her profits are about to fall.
Walter drives to the desert to hide the cash generated by his methamphetamine enterprise but he runs out of gas. As he rolls one of the money-full barrels, he comes by a house and asks to buy the truck sitting in the driveway. Initially, the truck is not for sale but after he offers the man a large stack of money this changes. Next, we see Walter load the barrel in the back of the recently purchased vehicle. Each person/business has a reservation price at which they’re willing to sell products or services. For this lucky resident, it appears $10,000 was at or above his reservation price. If his reservation price was lower than $10,000 then he would hear producer surplus.
Walter is about to leave, but Saul takes some time to advise against it. While it may seem like he’s doing what’s best for his family, Saul explains how law enforcement will come after Skyler and ruin Walter’s family. Walter is making a private decision about what to do and what he believes is best, but he may be ignoring all of the costs he imposes on other people by running. Saul suggests that if he truly cares about his family then he’ll turn himself in.
Ed visits and cares for Walter. As Ed prepares to leave, Walter offers him $10,000 to stick around for two more hours. Ed takes the offer but only for one hour and the two start playing cards. Based on the earlier exchange, Ed’s reservation price for each hour is above $5,000 but below $10,000.
Walter takes a trip back to his old Albuquerque home to see what’s left of it. After Skyler and the kids leave, no one wants the house and so it has succumbed to vandalism. Normally, property rights would incentivize people to take care of their property and protect it against vandalism, but no one wants an old meth kingpin’s home.
Walter loves peanut butter and jelly sandwiches. This simple meal is often the textbook example for complements in consumption. There are a variety of items that are often consumed alongside other items. When the price of one complement increases, it negatively impacts the consumption of the other.
After joining forces with Gus Fring, Walter learns about his new lab. The production facility is state of the art and includes some of the best equipment available on the market. This new equipment will allow Walt to produce even more of his blue meth than he could have previously imagined. Economies of scale are important in the production process. As facilities grow, their organization can begin producing large quantities, which lowers the average cost of production.
Gus and Walter discuss Walter’s decision to start cooking meth. Walt has debated the costs and benefits of his decisions throughout the show’s five seasons. Gus has an incentive to make sure Walter produces for him, so he tries to emphasize the importance of the benefits Walt has received and echoes how large those benefits are relative to the costs.
Walter has found a new friend in Gale and is surprised that a well-trained chemist decided to become a drug producer. The two of them aren’t the most obvious criminals. Gale believes his importance in the process is to help people get a clean product. Addicts will buy drugs without knowing what’s in them (asymmetric information), but at least Gale’s product is pure.
Walter rushes to the junkyard in order to make sure that recreational vehicle (RV), which he used for cooking methamphetamine and it is stored there, is destroyed. When he arrives, the junkyard owner, Old Joe, asks Walter why is he there. In doing so, Old Joe finds out that the DEA agents, who are interested in the RV, are coming there too. Further, he realizes that, as long as the RV is on his property, he could get in trouble, even if he does not actually own it. Property rights and the incentives to care for his business push Old Joe to demand Walter the RV removal. In addition to showing how property rights induce economic agents care for something they own, this video clip shows that people update their information sets and weigh costs and benefits when making decisions.
It looks like Hank has finally cost Jesse in the RV and he’s on the hunt to arrest him for meth production. In the process of trying to break into the RV, the owner of the junkyard asks if Hank has a warrant for the RV he’s trying to break into. While pleading his case, Hank doesn’t want to believe that he needs a warrant, but probable cause and the Fourth Amendment are in place to protect people and their personal property. It establish property rights and doesn’t allow the police to violate that property at their own will.
An illegal arms dealer is selling the criminal twins some bullet-proof vests. As other entrepreneurs, his profit-maximization incentives push him to offer bulk discounts on guns. Bulk discounts are a popular form of price discrimination to incentivize buyers to purchase more products than they may have originally intended.
In this ad for Los Pollos Hermanos, the narrator speaks of the importance of quality in the production process. Higher quality inputs imply a higher quality of output, whether it’s rotisserie chicken or crystal meth. Walter uses only the finest ingredients, in a state-of-the-art facility to produce the most popular version of meth on the market. This scene highlights the relationship between inputs and outputs in the production process.
The video clip is also helpful for discussing the principal-agent contract. More specifically, the clip presents Gus Fring as he supervises the packaging and loading of methamphetamine into trucks for distribution purposes. Gus is the owner of Los Pollos Hermanos, the man running the methamphetamine production operation, and therefore the principal. The laborers packaging the methamphetamine and the truck drivers transporting it are the agents. Sometimes agents do not act in the principal’s best interest. This behavior is also known as shirking, and one can prevent or limit it through adequate monitoring activities, which is precisely what Gus does.
This description adaptaed from Duncan, Muchiri, and Paraschiv (Forthcoming)
The benefit ($1.5 million) relative to the cost (time and effort) of cooking meth is different for Walter and Jesse. The benefits are obviously lower than the costs in Jesse case but not for Walter; as he seems happy with trading his time and effort for the cash. Even with clear and predictable benefits, people’s own subjective costs of their time can still make them disagree on the cost benefit analysis.
Jesse calculates that Fring is earning $93 million from Jesse and Walter producing meth, but he doesn’t feel adequately compensated. His focus on Fring’s revenue rather than his profits is causing him to feel vastly underpaid. What is Jesse forgetting? What about costs with the lab, packaging, distributing, and guarding the meth. In addition, the risk that Gus (the owner of the methamphetamine operation) takes represents an additional cost of doing business.
In a flashback to the pilot episode, Jesse and Walter are discussing the purchase of an RV to start cooking meth. The purchase of the famous RV would represent a fixed cost of production for their new business venture
Jesse fills up the RV’s tank and asks for a pack of cigarettes. However, he does not have the money to pay for these. He asks if he can come in a pay later but the cashier tells him that the gas station belongs to her dad, who is very careful when it comes to money. The gas station belongs to the father and he has the incentive to care for it, but the same can be said about his daughter. According to her, Jesse could leave and come back later.
Family meals are a great chance to see all the different complements and substitutes in a market. While milk and cereal are often consumed together (complements) there are other options people can decide upon to fulfill their breakfast need. Walter Jr opts for eggs and bacon (substitutes). The decision process involves weighing costs and benefits of alternatives.
Jesse visits a gas station and, after filling up and asking for a pack of cigarettes, he realizes that he has no cash on him. He proposes a trade; a little bag of “blue” methamphetamine against the gas and cigarettes. After hesitating initially, the cashier accepts the trade. However, for the trade to take place, a mutual coincidence of wants must emerge. It does in this case. Also, note that the cashier accepts the methamphetamine under the false belief that it does not create addiction.
After a plane crash in the city, Saul is looking for class action clients to sue the airline. While many negative externalities resulted from the crash, Saul is benefiting from the outcome of the crash.
Walt weighs the costs and benefits of his decision to start producing meth. The benefits are clear, the money will cover college tuition, tutors, mortgage payments, and all future expenses. The costs have been larger than Walter could imagine, but he believes all the benefits have outweighed the costs of his decisions.
Is it worth Skyler’s trouble to turn Walt in for making meth? She discusses this decision with her lawyer, but can’t seem to convince herself to go through the process. In this scene, Skyler is audibly weighing the costs and benefits of her decision. The lawyer seems to think that the benefits of turning her husband in outweigh the costs, but Skyler decides otherwise
There’s a lot of different complements and substitutes that go into a meal. Fries and ketchup are complements, while sushi and burgers are substitutes. The collective decisions we make are influenced by a variety of different products and aren’t isolated to a single market.
Controversial lawyer Saul Goodman is trying to buy back Jesse’s house. Negotiations start and seem to unfold well until the parties disagree about the sale price. The couple ask for $875,000 but Saul’s client offers only $400,000. The couple and their counselor feel offended by such an offer and, while mentioning that the meeting was a complete waste of their time, start walking out of the room. They stop once Saul mentions the methamphetamine laboratory that used to be in the basement. This unpleasant, but key attribute is purposefully hidden from the buyer to keep up the value of the house. However, in this case, the prospective buyer seems to have done his homework. Unfortunately, in many of today’s transactions, the information held by sellers is not available to buyers and vice versa. In cases where such information gaps persist and are systematic, markets unravel and ultimately fail.
Also, note that upon introducing himself, one of the sellers immediately recognizes Saul as “the lawyer on late-night television.” This is because of his catch-phrase “Better Call Saul”, which is present in all ads involving his business. Differentiation is a key feature of markets in which many of today’s sellers and buyers interact. Together, these traits outline some characteristics of monopolistically competitive markets.
Finally, it is worth mentioning that Mr. Gardiner, the couple’s counselor, is ardent to get right to business. This leads Saul to remark, “I get it. Flat-fee clients, am I right?” This arrangement incentivizes Mr. Gardiner to service his clients as fast as possible and therefore maximize his hourly pay. The more time he spends with his clients, the lower his hourly pay (since it is a flat charge), and the higher his opportunity cost.
This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)
See more: asymmetric information, incentives, incomplete information, information, monopolistic competition, negotiation, opportunity cost, product characteristics, product differentiation, profit maximization
Even drug manufacturers love peanut butter and jelly. This video clip shows Walter preparing himself a peanut butter and jelly sandwich. The two items are often the most common examples used when discussing complements in consumption.
It’s time for Walter to quit so he stops by to visit Gus Fring. Gus wants to offer Walter 3 million dollars to keep making his blue meth for 3 more months, but even that amount isn’t worth it to Walt. Walter is trying to piece his life back together and believes that continuing to produce his blue meth isn’t worth the amount he’s giving up. Walter admits to Gus that he has more money than he knows what to do with. Even for the wealthy, there’s diminishing returns to acquiring more income.
The criminal twins are looking for new clothing so that they don’t stand out as easily in the desert. They come across a family’s clothesline and begin changing. The family easily decides that the cost of confronting the twins isn’t worth the benefit of keeping their clothes. Their silence is rewarded because the twins know the benefit of fresh clothes is worth more than the car they were driving. This exchange shows two differ sets of people considering whether benefits outweigh costs.
In a small Mexican town, some of the locals do not walk but crawl towards the shrine of Santa Muerte. This behavior is a perfect example of how cultural norms create markets, in this case for knee and elbow guards. There is no government authority dictating that people buy the guards or that people sell them, but it happens organically. What other items do you think would be popularly sold along this passageway?
A plane crashed in the city of Albuquerque. From damaged property to the loss of life on the ground, everybody is dealing the negative externalities brought about by the crash. One explanation is that the control tower agent was grieving and not paying attention to his job. If true, his private decision to go to work could have very large social costs.
Skyler speaks to Ted Beneke (her boss) about some underreported income, which she found while analyzing the company’s accounting records. Initially, Ted labels this as an accounting error, but soon admits to underreporting income in an attempt to avoid paying more in income taxes. From this conversation, it’s clear that Ted purposefully engages in this illegal activity by taking into account the costs and benefits of his decisions. The scene is also useful for discussing the decline in tax receipts during a recession as well as its potential causes. Skyler also has to weigh the costs and benefits of reporting her boss (and friend) to the IRS.
Walter is shopping for primer for home renovations, but stumbles across a young man who is clearly purchasing the necessary inputs to start making meth. Because of his familiarity, Walter suggests that the young man change the type of matches he uses if he wants to make meth. These inputs are so specific to making crystal meth that Walter is able to recognize it immediately and even tells the young man that others will notice the combination of items he’s purchasing.
In the background of the breakfast scene, a local news broadcast discusses the rapidly deteriorating American economy. This episode aired in May 2009 in the midst of the Great Recession. Interestingly, despite one of the worst time periods in American economic history, the White family seems unbothered by the news. The NBER is the agency responsible for classifying whether the economy experienced a recession, but they often don’t make the announcement until well after the recession has concluded. As a result, families often aren’t aware just how bad things will become in the middle of a recession.
Now that Blue Sky (the methamphetamine cooked by Walter and Jesse) faces no other competition in the Albuquerque market, Walter realizes that the price of their product is too low. He goes on to add that, once the market is cornered, the price should be raised; “simple economics”.
The RV needs to be stored, and Jesse is hoping that the person who helped him tow the RV away before the DEA could find it would also be willing to let him store it on his property. The issue at hand is that Jesse had earlier stolen the RV and destroyed part of the property in the process. Jesse is hoping that they can come to a new agreement on storing the RV. As before, Jesse is in a bind and needs to store the RV. He doesn’t have time to shop around, so the tow operator has the upper hand in the negotiating process. When consumers don’t have a lot of time to shop around, their demand for services is often pretty inelastic.
After getting kicked out of his parents’ house, Jesse is on the hunt for a new apartment. After the potential landlord realizes Jesse doesn’t have a legal job, she raises the rent on the apartment. Part of her ability to do this comes from the fact that Jesse is a rental risk and she needs to be compensated for the additional risk she takes on from renting to someone without a legal job. Jesse’s demand is also pretty inelastic because he needs a place to live and there aren’t many places willing to lease to a person without a formal job.
Jesse’s getting kicked out because his parents believe he’s making meth in the house. His confusion stems from the fact that a relative passed the house down to him, so he believes the house belongs to him. Only now does Jesse learn that his parents actually own the house, which gives them the right to vacate him from the house. Property rights are an important component of contracts so that it’s clear who is able to control that property.
The DEA is close to catching Jesse and Walter, which means Jesse needs to get the meth equipment out of his house fast. Badger knows a guy who owns a tow company and will tow away the RV, but it’s going to cost Jesse. This is a great example of inelastic demand for services. The DEA is close behind, and Jesse doesn’t have a lot of time to shop around for a better deal. The tow truck driver knows this, which is why he mentions the price is so high because of the cargo, not the miles. This means Jesse will need to pay a hefty sum to get his discrete services.
This clip shows Jesse interviewing for, what he thinks it is, a standard sales position. However, he soon finds out that he is in for a sign-twirler job. Nevertheless, the employer would have considered Jesse for the sales position if he possessed the required skills (i.e., a sales license, two-year and on-the-job sales experience, and a college degree). Even though Jesse has significant (on the street) sales experience, he is not qualified for the standard sales position he thought he applied for. Since Jesse lacks the prerequisite skills, he must continue to be frictionally unemployed (until he can find a suitable position).
Tuco is getting worried and suggests that they all move to Mexico so that the government will stop tracking them. Walter and Jesse aren’t keen on this idea because it means they’d have to give up their family, and that’s a cost Walter isn’t willing to make, even for lots of money. The whole reason he started making meth was to support his family, but Tuco doesn’t seem to understand the issue. He suggests that he can just get another family, implying they are substitutable.
After watching a gruesome beating, Jesse and Walter are officially scared of their new distributor, Tuco. Walter starts to calculate just how much money he needs to earn selling meth in order to take care of his family. Becker’s theory on the rational criminal suggests that criminals take the time to calculate the costs and benefits before committing their crimes. Walter is even careful to consider future inflation changes as he determines the appropriate amount to “invest.”
In order to start producing large quantities of meth, Walter comes up with a new chemical approach to producing a substitute for pseudoephedrine. This “old school biker” meth is a lost art, but it narrows down the number of people who understand how the chemistry works. When resources are in short supply, prices typically rise. The responsiveness of firms to their inputs often deals on how easily other resources can be acquired.
After promising their new distributor they could produce 4 pounds of meth, Jesse starts freaking out. When the original deal was 2 pounds, Jesse was concerned about being able to buy enough pseudoephedrine to produce that. After showing up at their earlier meeting with only half of a pound, it seems impossible that the two of them can make 4 pounds weekly. It turns out that Walter can chemically create the same effect, but he needs Jesse to pick up some supplies. The elasticity of supply often dictates that the responsiveness of a good depends on how easily other substitutes can be acquired.
Tuco shows up in a junkyard expecting to purchase 2 pounds of meth from Walter and Jesse, but the two of them only brought about half a pound. Tuco isn’t happy because he’s wasted his time coming out for such a small quantity and isn’t too keen on their excuses. He docks part of their pay for “wasting his time.” All of our actions, including taking time to do something, has costs even if the price is zero. People often forget the value of their time, but not Tuco.
Walter finds a distributor to sell his meth to, but it requires that the two of them produce two pounds per week when they were previously making only one pound. Walter doesn’t see the issue because it wouldn’t take that much more time, but he’s excited for the significant increase in income from this deal. What Walter doesn’t realize is that there are capacity constraints when it comes to the inputs. Jesse is responsible for acquiring pseudoephedrine, which is the necessary ingredient to produce meth. Because of various US laws aimed at preventing pseudoephedrine to be used in meth, customers at drugstores can only purchased a fixed quantity at a time. Jesse drives hundreds of miles to collect pseudoephedrine from “smurfs,” but that can only produce 1/2 pound of meth each week. He doesn’t realistically see how the two of them can find enough pseudoephedrine to produce the two pounds of meth per week their new distributor is requesting. Luckily, Walter is a VERY good chemist!
See more: capacity constraints, economies of scale, government regulation, incentives, inelastic, optimal output, profit, Resource market, scale of production, scarcity, supply elasticity, underground economy
There’s an arrest on school property, and Hank shares why he believes the janitor was responsible for the recent thefts at the school. The theft corresponds to popular equipment used to make meth, and the janitor (Mr. Archilleya) had a past record for possession of marijuana, had access to the school, and during a search of his vehicle, had possession of marijuana. Skyler is confused how Hugo could even get a job at a school with his record, but Walt notes Hugo doesn’t seem like a drug dealer. This is a classic example of mixing correlation with causation. Just because Hugo has markers that could potentially make him a criminal, it doesn’t mean that it would cause him to be willing to steal from his employer. Society often mixes correlation with causation, which results in some unfortunate outcomes.