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.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: 44 Teele Avenue Medford, MA 02155|
Web page: http://ase.tufts.edu/gdae
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Baumol,William J. & Oates,Wallace E., 1988.
"The Theory of Environmental Policy,"
Cambridge University Press, number 9780521322249, November.
- Frank Ackerman & Kevin Gallagher, . "00-05 "Getting the Prices Wrong: The Limits of Market-Based Environmental Policy."," GDAE Working Papers 00-05, GDAE, Tufts University.
- Angus Deaton & Guy Laroque, 1990.
"On The Behavior of Commodity Prices,"
NBER Working Papers
3439, National Bureau of Economic Research, Inc.
- Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:dae:daepap:01-02. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Erin Coutts)
If references are entirely missing, you can add them using this form.