Costs & Production · Growth · Jesse · Macroeconomics · Mike · Walter

Owners, Not Employees

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)

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Costs & Production · Jesse · Saul · Skyler · Walter


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.

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Behavioral & Game Theory · Foundations · Growth · Macroeconomics · Skyler

Faulty Accounting

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.

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