Jesse · Market Structures · Saul · Walter

Cooking Again

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)

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Inequality · Jesse · Macroeconomics · Walter

Cost of Getting Even

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)

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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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