Mike is sent to do some snooping, but he’s going undercover as a repairman that’s been hired. The customer is averse to electricity and had requested that no power tools be used. Mike knows this, but needs the customer out of the area so that he can snap some pictures. He brings power tools to ensure that the customer gives him some privacy. From an economics standpoint, Mike makes a compelling case for power tools as it relates to productivity.
He could make the repairs things the old-fashioned way: “going at it like Fred Flinstone.” The tools, as Mike explains, helps turn a two-day job into a one day job. Capital investments and technology helps producers lower the cost of producing items. From a PPF standpoint, it allows the curve to shift outward and producers to be able to produce more stuff given a fixed amount of time.
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)
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)
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.
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.
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.
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.
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).
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.”
Walter tracks down his former student, Jesse, with the intention of collaborating with him in the production of methamphetamine. Walter’s intentions become obvious once he starts revealing that the Drug Enforcement Agency (DEA) has apprehended Jesse’s former business partner. Walter goes further and adds, “But you know the business and I know the chemistry. I’m thinking … maybe you and I could partner up.”
While Jesse has performed both tasks in the past, there is little doubt that Walter, because of his chemistry knowledge and perhaps better task-management skills, is more productive at making methamphetamine as well as distributing it. Even though Walter has absolute advantage in cooking and distributing methamphetamine, the logic of comparative advantage tells us that Walter and Jesse should collaborate. More specifically, Walter should cook while Jesse should distribute/sell the methamphetamine.
Incentives, and how individuals respond to incentives, represent another key economics concept. In this clip, Walter’s offer for a partnership deal comes with a catch:
Jesse: “You wanna cook crystal meth? You. You and me.” Walter: “That’s right. Either that, or I turn you in.”
Walter threatens to inform the DEA about the methamphetamine business if Jesse chooses not to join the partnership. Here, Walter is encouraging some action (joining him) by issuing a threat (turning Jesse in). Their interaction represents an ultimatum game, in which Walter’s threat is an example of a negative incentive.
This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming).
The Economics of Breaking Bad 