01-02 "Mixed Signals: Market Incentives, Recycling, and the Price Spike of 1995"
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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- Angus Deaton & Guy Laroque, 1992.
"On the Behaviour of Commodity Prices,"
Review of Economic Studies,
Oxford University Press, vol. 59(1), pages 1-23.
- Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Development Studies.
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- Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Public and International Affairs.
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- 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.
- Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
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- Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521311120, February.
- 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.
- Frank Ackerman & Kevin Gallagher, "undated". "00-05 "Getting the Prices Wrong: The Limits of Market-Based Environmental Policy."," GDAE Working Papers 00-05, GDAE, Tufts University. Full references (including those not matched with items on IDEAS)
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