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Mixed Signals: Market Incentives, Recycling, and the Price Spike of 1995

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Author Info

  • Frank Ackerman

    (The Global Development And Environment Institute at Tufts Universty)

  • Kevin Gallagher

    (The Global Development And Environment Institute at Tufts Universty)

Abstract

Environmental economics assumes that reliance on price signals, adjusted for externalities, normally leads to efficient solutions to environmental problems. We explore a limiting case, when market volatility created “mixed signals”: waste paper and other recycled materials were briefly worth an immense amount in 1994-95, then plummeted back to traditional low levels in 1996. These rapid reversals resulted in substantial economic and political costs. A review of academic and business literature suggests six possible explanations for abrupt price spikes. An econometric analysis of the prices of wood pulp and waste paper shows that factors that explained price changes in 1983- 93 contribute very little to understanding the subsequent price spike. From the econometric analysis and from other sources, we conclude that speculation, rather than “rational” economic factors, must have played a major role in the price spike. If speculatively driven price spikes can disrupt an environmentally important industry such as recycling, then the surprising implication for public policy is that measures to control or stabilize prices, far from interfering with the market, may actually help to make it more efficient.

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File URL: http://128.118.178.162/eps/game/papers/0106/0106001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 0106001.

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Length: 27 pages
Date of creation: 13 Jun 2001
Date of revision:
Handle: RePEc:wpa:wuwpga:0106001

Note: Type of Document - PDF; pages: 27; figures: n/a. Other working papers available at www.gdae.org
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Web page: http://128.118.178.162

Related research

Keywords: price spike; recycling; economic policy; market volatility;

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References

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  1. Nick Hanley & Rick Slark, 1993. "Cost-Benefit Analysis of Paper Recycling: A Case Study and Some General Principles," Working Papers Series 93/13, University of Stirling, Division of Economics.
  2. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
  3. Angus Deaton & Guy Laroque, 1990. "On The Behavior of Commodity Prices," NBER Working Papers 3439, National Bureau of Economic Research, Inc.
  4. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  5. Christensen, Laurits Rolf & Caves, Richard E, 1997. "Cheap Talk and Investment Rivalry in the Pulp and Paper Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 47-73, March.
  6. Deb, Partha & Trivedi, Pravin K & Varangis, Panayotis, 1996. "The Excess Co-movement of Commodity Prices Reconsidered," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 275-91, May-June.
  7. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  8. Frank Ackerman & Kevin Gallagher, 2001. "Getting the Prices Wrong: The Limits of Market-Based Environmental Policy," Development and Comp Systems 0106005, EconWPA.
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Cited by:
  1. Baumgartner, Stefan & Winkler, Ralph, 2003. "Markets, technology and environmental regulation: price ambivalence of waste paper in Germany," Ecological Economics, Elsevier, vol. 47(2-3), pages 183-195, December.

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