Tag Archives: Theories

A supply-side giffen good?

The Oregonian reports that farmers face a choice to grow grass and wheat and they chose to grow more wheat.  The problem? Wheat prices have been falling and are currently at their lowest. Doesn’t that seem a bit odd? Some say it is only a phenomena found in the Willamette Valley.  Farmer’s say that they want to increase output in order to provide more cash flow. So, as wheat prices are falling, they are increasing their supply.  This is obviously backwards.  Supply curves are supposed to be upward sloping where if the price increases, producers will increase quantity.

This reminds me of that weird theory called Giffen goods that always got tacked on when learning about demand curves in economics class.  Giffen goods, although only observed on the demand side, experience an upward sloping demand curve (price goes up, quantity demanded goes up) which is contrary to the law of demand that says it is downward sloping (price goes up, quantity demanded goes down).

Using the same logic of the Giffen good with the farming example, you can say this is sort of a supply-side Giffen good.   Instead of an upward sloping supply curve, (price goes down, quantity supplied goes down) the farming example has a downward sloping supply curve (price goes down, quantity supplied goes up).   Some fancy econometrics would need to prove it but I think I can explain intuitively why the farmers are doing it.

1) They are constrained by their ability to produce. They can either produce wheat or grass, but nothing else, and not both.

2) They are constrained by their income and don’t have enough cash to invest in alternatives.

3) They haven’t reached the shutdown point where their variable costs exceed their fixed costs. Since they are price takers, they have no choice.

So given their choices, the only way to profit maximize is to produce wheat at a lower price since grass fetches for even lower.

I could be wrong about this, so please comment if I am mixing up my economics.  I am assuming that this is a long-run behavior.  The farmers are given enough time to make a decision regarding falling wheat prices. I am aware of the assumptions in the short-run.  So that maybe what the debate, at least in economics, would be about.  Nevertheless it is an interesting exercise in understanding perfectly competitive markets and how it influences producers behavior.

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Upcycling: Another name for the waste product aftermarket?

I stumbled upon this well put together blog, Intercon, and came upon this post entitled Recycling vs. Upcycling: What is the difference? In the post, the author defines upcycling as:

process that can be repeated in perpetuity of returning materials back to a pliable, usable form without degradation to their latent value—moving resources back up the supply chain.

Sounds a little bit like a term I coined called the “waste product aftermarket.”  The waste product aftermarket is an idea that I have a few kinks to work out, – I haven’t been able to muster up any formal definition for it – (watch out grad school) but I find many similarities with this author’s proposition for the concept.  My aim here is to flesh out the differences between the two.

Both are similar in that they define a concept often used in sustainability – about closing the link between the industrial supply chain’s input beginning to its waste end.  In ecological economics terms, this is a function of industrial ecology where resource inputs that will have value added to them also have waste outputs all along the product lifecycle.  Traditional industrial production models are linear based and describe the waste outputs (which add no value to the supply chain) as externalities.  However, in an industrial ecological production model, instead of waste being an externality, it is a valuable resource that, with value added such as recycling, could then become a resource input to begin another product life cycle again.  This idea assumes sustainability because the production cycle becomes a closed loop system where new resources entering the system are not used and then wasted, they are simply reused over and over.  The benefit of this? Less environmental damage from the front end and the back end.

But lets get back the difference between the definitions.  The waste product aftermarket is the actual market where suppliers (those who generate the waste whether its industry or consumers) meet with buyers. (those who add value to the waste, like recyclers)  The buyers then sell their newly reused product and either contract out their products (or put on a commodities market) as inputs for beginning the new product cycle.  Like any market, profit maximization is the key guide here.  While this isn’t a concrete definition, (this is just a blog after all) I hope this makes my ideas a little clearer.

What upcycling to me is the process of waste reaching an intermediary in the waste product aftermarket which can then be created into a usable form.   For now on, I will continue to use this definition to explain this particular process.  To understand more about the waste product aftermarket, you will just have to read my blog more!

Clean coal finally a reality without the expense?

Instead of pumping C02 into the ground we can just mix it with seawater to create something that resembles coral, a substance that is harmless to the earth and and can be useful for creating building materials. From Thomas Friedman:

If you combine CO2 with seawater, or any kind of briny water, you produce CaCO3, calcium carbonate. That is not only the stuff of corals. It is also the same white, pasty goop that appears on your shower head from hard (calcium-rich) water. At its demonstration plant near Santa Cruz, Calif., Calera has developed a process that takes CO2 emissions from a coal- or gas-fired power plant and sprays seawater into it and naturally converts most of the CO2 into calcium carbonate, which is then spray-dried into cement or shaped into little pellets that can be used as concrete aggregates for building walls or highways — instead of letting the CO2 emissions go into the atmosphere and produce climate change.

If this can scale, it would eliminate the need for expensive carbon-sequestration facilities planned to be built alongside coal-fired power plants — and it might actually make the heretofore specious notion of “clean coal” a possibility.

Assuming it is scientifically possible and economically viable:

– Reduced demand for conglomerates used in concrete lessens environmental damage from rock quarries (assuming coal plants produce this coral cheaply) and reduces holes in mountains

– Increased demand for coal provides incentive for finding cheap coal by using cheaper extraction processes, leading to blowing up mountains for it and increases holes in mountains

Oh well, less carbon is still a pareto efficient outcome in my book.  Maybe in a quest for economies of scale, coal plants can start to diversify their carbon sequestration technologies from creating building materials to providing C02 in my soda.*  Mmmmm…coal’d soda…

HT: Environmental Economics

*I think the industry already does this but I could be wrong…

Waste products aftermarket: theoretical framework

This is starting to become a serious interest of mine. Previously, I did a post on bio-diesel made from chicken fat (here) and how it may mark the beginning of a waste product aftermarket within green economies.   I will also write a piece on a company I am currently reading up on, Total Reclaim. (here) Although the idea itself is nothing new, I feel I need to make a theoretical framework for this.

Essentially, for our 21st-century economy, a new economy, the “green economy,” going green is expected to be the next big thing.  This proposition has been made solely on the popular value judgment that there is a rising demand for eco-friendly products.    There is nothing new about this.  We can already see this with products ranging from toilet paper made from recycled paper to cell phones made from recycled materials.

There is nothing new about recycled products or aftermarkets either.  If businesses are able to find ways to cut down and recoup costs by either adding value on site through production or from scrap, most are going to do so.  (see auto aftermarkets as a popular example) Marketing products as green helps signal to eco-conscious consumers that these particular products (such as the cell phone linked above) will lower ones environmental footprint.

But is there necessarily a market for it?  I believe that currently, there is, but it is fractured and not on par with the types of commodity markets we have today.  Most business decisions regarding recycled products are not core competencies, but are more along the lines of reducing the marginal unit cost of particular products and their waste. These are the questions I want to continue to ask as more and more examples show up throughout the U.S. (and the world) on how businesses start to shift to waste products as a revenue source rather than efficiency measures.

How do I believe this change will happen?  Remember, most of the important part of the surge in the waste product aftermarket is the demand to go green.  Businesses have incentives to offer value for eco-friendly consumers as the demand to go green becomes even more popular.  But how far will it go? As businesses start to take advantage of utilizing new technologies and implementing cost effective production techniques, cost for recycling will severely plummet.  As profitability ensues, businesses will be able to acquire capital in order for them to grow.  Then industry consolidation should be in order as businesses begin to attain economies of scale.  By then, these companies will be able to sell their products on an open market commodities exchange, much like what we do with many natural resources available today.   And the incentive for doing this? Commodities will be facing a long-term supply shortage as more and more countries begin to develop, demanding more resources and putting a strain on what is currently available.  These forces will drive up the price of commodities, (a long-term trend we have currently experienced via China and other nations) making recycled materials an economic reality.  And the best part is that it won’t be dependent upon the demand for green products anymore, but a means for making our industrial ecology more efficient.

This is the value proposition I am making for the future of our world economy.  Technologies continue to be developed that make the production and reduction of physical goods not only a scientific reality, but an economic one.  As more and more technological breakthroughs make it through the news, I will be there to comment on it. (here)  As more and more environmental policy creates a more economic reality, I will be there to comment on it. (here) As more and more unexpected impacts from economic decisions influence the way we produce and consume products, I will be there to comment on it. (here)

I will continue my posts for waste product aftermarkets in parts as more and more real world cases come to light, charting the progress of this future.  I believe that this is the most realistic avenue that our world can move in, not only for the betterment of the world, but to push possibilities farther then we have ever imagined.

Now that’s a complement!

Turns out cigarettes and gambling are complement goods: (here)

State video gambling tax receipts plummeted by nearly 18 percent in the last quarter of 2009, buffeted by the beginning of a statewide indoor smoking on bars and casinos and a recession that hit Montana hard.The gross video gambling-machine taxes will be about $12.5 million for the quarter that ran from October through December 2009, said Rick Ask, administrator of the Gambling Control Division in the state Justice Department. That’s about $2.7 million, or 17.8 percent, less than what the tax revenues were the previous three months, from July through September 2009.

The quarterly gambling-machine taxes are down by 16.8 percent, or $2.5 million, compared with the previous three-month period from September through December 2008, Ask said.

It certainly shows the unintended consequence of a policy that although is good at heart; can hurt the bank. So why would gambling and cigarettes be complements? Does nicotine help relieve the stress of losing money? Maybe smoking has a direct effect on one’s discount rate for gambling.

Why WA’s Liquor Store Expansions will Fail Budget Fix: Putting my research to the test!

During my undergraduate study, I embarked on a year’s worth of research composed of article and data compilation, database modeling, hypothesis testing and then presenting my findings.  My hypothesis happened to be this:

Generally, given an increase in the state regulation of alcohol, alcohol consumption would decrease.

My Results: It was found that, in general, decreases in alcohol consumption was statistically significant given an increase in state regulation, however, the size of the changes in consumption was insignificant, illustrating no economic significance.

During my presentations, I was asked if there was a general trend for all states to move out of monopolistic control regulation and move more towards a private license system.  I said that in general, during budget shortfalls, states may be tempted to loosen their liquor control laws in order to get more revenue from taxes.  More importantly, any new alcohol license that is available for purchase, in general, would yield large, one time sums of money.

So what did the state of Washington decide to do? Open 5 more state stores, sell 10 more licenses for new stores, open seasonal stores, allow stores to sell on Sunday and allow the offering of liquor store gift cards.  (here)  Armed with my findings, let’s asses this!

First, although I wish I compiled it, I didn’t have data for Sunday sales and gift cards (even though available) so I don’t know what impact they will have. (probably none)  Second, Liquor laws are very weird, and the ability to collect accurate and meaningful data, is even harder.  What I do have that can be meaningful, however, is number of liquor licenses.

What I found is that given a particular state, any 1% increase in liquor licenses will yield an inelastic change in consumption .13%.  That is a very small change.  Which makes sense given that liquor is a very inelastic commodity.  To keep it simple, the same could be said about wine as well.   So how much of an increase will there be for liquor licenses? By adding 15 stores you would increase licenses roughly by 5%.    Consumption will change 5 times that of a 1% increase which calculates to .65%.  In 2008, alcohol sales was $825 million.  Increase this by .65% thanks to new licenses and you end up with a $5.4 million increase in consumption making sales $830 million for the next year, assuming sales would remain the same.  If the current growth in alcohol sales continue, a simple trend analysis would yield an estimated $890 million in 2009.  The combination of the two would yield sales of over $895 million.  With a 42% markup,  the change from 2008 to 2009 would yield a profit of $29.4 million.  The change in licenses only gives a profit of $1.3 million.  That doesn’t even take into account their operating budget.     This would be an overestimate considering that the total alcohol sales is comprised of small percentages from beer and wine tax receipts.

So, the conclusion of this analysis? A paltry $1.3 million doesn’t even make a dent in the state’s projected budget deficit of $3.6 billion.   This doesn’t take into consideration the proceeds from new licenses and all the license fees. I should point out that license fees for 2008 was only $11.2 million. With that size, it would hardly make a difference.

The best way WA can put a dent in it’s budget shortfalls would be to shrink the liquor control board substantially (save operational costs) and auction their 350 state licenses off to private contractors.  My mentor, Dr. Andrew Buck, in addition to Dr. Simon Hakim, both Temple University professors, found evidence to support the privatization of Pennsylvania, modeled after West Virginia’s auction of licenses during privatization.

Even though labor is an important component in the politics of liquor control board privatization — and in this economic environment, a heady one — states can be tempted by the fruit that license sales could bare.

Gender Unemployment Gap

From Free Market Mogo, the current recession has had a huge gender unemployment gap. (2.7% to be exact)

Theories?

– Most construction employment, one of the hardest hit, is primarily occupied by men.  Same could be said for finance.

– Men are more likely to be in cyclical occupations since they have higher mobility and tend to move into growing, but volatile, job markets.  Women prefer to be more grounded and take less cyclical occupations.