Government Intervention · Walter

Missing Serial Number

In addition to depicting the underground market for firearms, this clip is also useful to spark a discussion about gun control policies. Walter could purchase a gun legally since he doesn’t have a criminal record, but he’s willing to purchase an illegal one without a serial number.

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Government Intervention · Skyler · Walter

Money Laundering

Skyler starts doing the books for Walter’s drug income and is ready to learn how the money gets laundered. She doesn’t think Saul’s setup is legitimate enough to get past the IRS so she wants to talk to him directly. It turns out that Saul’s ideas seem ludicrous to her. One unintended consequence of policies that outlaw the production/distribution/consumption of drugs is the creation of money-laundering operations such as “Ice Station Zebra Associates”. Walter uses this “company” to launder the money he earns from manufacturing methamphetamine.

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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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Market Structures

Bulk Discount

An illegal arms dealer is selling the criminal twins some bullet-proof vests. As other entrepreneurs, his profit-maximization incentives push him to offer bulk discounts on guns. Bulk discounts are a popular form of price discrimination to incentivize buyers to purchase more products than they may have originally intended.

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Gus · Labor · Market Structures

Chicken and Drugs

In this ad for Los Pollos Hermanos, the narrator speaks of the importance of quality in the production process. Higher quality inputs imply a higher quality of output, whether it’s rotisserie chicken or crystal meth. Walter uses only the finest ingredients, in a state-of-the-art facility to produce the most popular version of meth on the market. This scene highlights the relationship between inputs and outputs in the production process.

The video clip is also helpful for discussing the principal-agent contract. More specifically, the clip presents Gus Fring as he supervises the packaging and loading of methamphetamine into trucks for distribution purposes. Gus is the owner of Los Pollos Hermanos, the man running the methamphetamine production operation, and therefore the principal. The laborers packaging the methamphetamine and the truck drivers transporting it are the agents. Sometimes agents do not act in the principal’s best interest. This behavior is also known as shirking, and one can prevent or limit it through adequate monitoring activities, which is precisely what Gus does.

This description adaptaed from Duncan, Muchiri, and Paraschiv (Forthcoming)

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Costs & Production · Jesse · Walter Jr.

Missing the Costs

Jesse calculates that Fring is earning $93 million from Jesse and Walter producing meth, but he doesn’t feel adequately compensated. His focus on Fring’s revenue rather than his profits is causing him to feel vastly underpaid. What is Jesse forgetting? What about costs with the lab, packaging, distributing, and guarding the meth. In addition, the risk that Gus (the owner of the methamphetamine operation) takes represents an additional cost of doing business.

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Jesse · Supply and Demand

Storage Costs

The RV needs to be stored, and Jesse is hoping that the person who helped him tow the RV away before the DEA could find it would also be willing to let him store it on his property. The issue at hand is that Jesse had earlier stolen the RV and destroyed part of the property in the process. Jesse is hoping that they can come to a new agreement on storing the RV. As before, Jesse is in a bind and needs to store the RV. He doesn’t have time to shop around, so the tow operator has the upper hand in the negotiating process. When consumers don’t have a lot of time to shop around, their demand for services is often pretty inelastic.

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Costs & Production · Jesse · Supply and Demand · Walter

Worth the Money

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!

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