Walt’s Credible Threat

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To end the series, Walter needs to find a way to get his money to his son, but he knows that the federal government would confiscate the money if he does it himself. Instead, he seeks help from his former business associations, Elliot and Gretchen Schwartz. He asks them to launder the money through their business so that it appears to be a charitable donation. The Schwartz’s agree, but because he’ll die soon, Walter has no guarantee that they will actually go through with the donation.

Walter tells the Schwartz’s that he’s hired “the best hitmen” that he could find and that if the money is not donated to his son shortly after his son’s 18th birthday then Elliot and Gretchen will be assassinated. In order for such a threat to be credible, Walter hires Pete and Badger to stand outside the house and point laser pointers at the two of them to have them believe they were actually snipers. Walter’s persona leads to his credibility as well.

See more: asymmetric information, credible threat, game theory, imperfect information, incentives, insurance, opportunity cost, risk averse, strategic behavior, ultimatum game

Who Guards the Guards?

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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.

See more: efficiency wages, incentives, labor, monitoring, principle agent problem, shirking

Costs & Production · Gus

A Real Professional

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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.

See more: capital, economies of scale, elasticity of supply, fixed costs, incentives, inputs, investment, invisible hand, production, profit, profit maximization, variable costs

Gus · Healthcare · Jesse · Mike

Medical Incentives

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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.

See more: incentives, health economics, health care, cost benefit analysis, efficiency, equity, fairness

Foundations

Paying the IRS

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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.

See more: cost benefit analysis, incentives, unintended consequences

Foundations · Labor · Supply and Demand · Walter

Truck for Cash

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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.

See more: exchange, incentives, opportunity cost, producer surplus, reservation price, supply, transaction, willingness to sell

Behavioral & Game Theory · Foundations · Walter

Crush the RV

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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.

See more: cost benefit analysis, incentives, property rights

Foundations · Hank · Jesse · Walter

Probable Cause

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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.

See more: incentives, property rights

Behavioral & Game Theory · Foundations · Jesse

Not My Decision

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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.

See more: barter, incentives, ownership, principle agent problem, private property, property rights

Behavioral & Game Theory · Market Structures · Saul

Meth Lab in the Basement

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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

Costs & Production · Jesse · Supply and Demand · Walter

Worth the Money

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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

Foundations · Jesse · Macroeconomics · Trade · Walter

Let’s Make a Deal

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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