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

Author

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  • Gallagher, Kevin P.
  • Ackerman, Frank

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.

Suggested Citation

  • Gallagher, Kevin P. & Ackerman, Frank, 2001. "Mixed Signals: Market Incentives, Recycling and the Price Spike of 1995," Working Papers 15598, Tufts University, Global Development and Environment Institute.
    • Handle: RePEc:ags:tugdwp:15598
    DOI: 10.22004/ag.econ.15598
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    References listed on IDEAS

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    1. 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.
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    3. Frank Ackerman & Kevin Gallagher, "undated". "Getting the Prices Wrong: The Limits of Market-Based Environmental Policy," GDAE Working Papers 00-05, GDAE, Tufts University.
    4. Michael, Jeffrey A., 1998. "Recycling, International Trade, and the Distribution of Pollution: The Effect of Increased U.S. Paper Recycling on U.S. Import Demand for Canadian Paper," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 30(1), pages 217-223, July.
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    2. 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.
    3. Mansikkasalo, Anna & Lundmark, Robert & Söderholm, Patrik, 2014. "Market behavior and policy in the recycled paper industry: A critical survey of price elasticity research," Forest Policy and Economics, Elsevier, vol. 38(C), pages 17-29.

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