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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Externalities & Types of Goods · Hank

Saying Goodbye

Walter takes a trip back to his old Albuquerque home to see what’s left of it. After Skyler and the kids leave, no one wants the house and so it has succumbed to vandalism. Normally, property rights would incentivize people to take care of their property and protect it against vandalism, but no one wants an old meth kingpin’s home.

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Behavioral & Game Theory · Foundations · Walter

Crush the RV

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.

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Foundations · Hank · Jesse · Walter

Probable Cause

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.

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Behavioral & Game Theory · Foundations · Jesse

Not My Decision

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.

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Jesse · Supply and Demand

Renting an Apartment

After getting kicked out of his parents’ house, Jesse is on the hunt for a new apartment. After the potential landlord realizes Jesse doesn’t have a legal job, she raises the rent on the apartment. Part of her ability to do this comes from the fact that Jesse is a rental risk and she needs to be compensated for the additional risk she takes on from renting to someone without a legal job. Jesse’s demand is also pretty inelastic because he needs a place to live and there aren’t many places willing to lease to a person without a formal job.

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Foundations · Jesse

Moving Out

Jesse’s getting kicked out because his parents believe he’s making meth in the house. His confusion stems from the fact that a relative passed the house down to him, so he believes the house belongs to him. Only now does Jesse learn that his parents actually own the house, which gives them the right to vacate him from the house. Property rights are an important component of contracts so that it’s clear who is able to control that property.

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Foundations · Jesse · Supply and Demand

Precious Cargo

The DEA is close to catching Jesse and Walter, which means Jesse needs to get the meth equipment out of his house fast. Badger knows a guy who owns a tow company and will tow away the RV, but it’s going to cost Jesse. This is a great example of inelastic demand for services. The DEA is close behind, and Jesse doesn’t have a lot of time to shop around for a better deal. The tow truck driver knows this, which is why he mentions the price is so high because of the cargo, not the miles. This means Jesse will need to pay a hefty sum to get his discrete services.

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