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.
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
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
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.
Jesse brings in the revenue from the first batch of meth, and Walter is less than impressed with the amount of money that has come in. Walter had made a pound of meth (16 ounces), but Jesse has only sold 1 ounce because he’s selling it directly to users. Walter isn’t happy with the payoff because he feels the risk he is taking by breaking the law should result in a lot more profit. The two brainstorm ways to sell in larger quantities, but it turns out they had earlier killed the one person they knew who would be buy in bulk. By selling in larger quantities, the two can lower their average fixed costs (economies of scale), but it also means that they’re going to have to find a partner to do that because Jesse doesn’t have a big enough footprint to sell that much dope.
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).
See more: absolute advantage, comparative advantage, credible threat, credible threat, division of labor, gains from trade, game theory, incentives, opportunity cost, specialization, tradeoffs, ultimatum game