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

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  • Frank Ackerman
  • Kevin Gallagher

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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  • Frank Ackerman & Kevin Gallagher, "undated". "Mixed Signals: Market Incentives, Recycling, and the Price Spike of 1995," GDAE Working Papers 01-02, GDAE, Tufts University.
    • Handle: RePEc:dae:daepap:01-02
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    References listed on IDEAS

    as
    1. Tilton, John E., 1999. "The future of recycling," Resources Policy, Elsevier, vol. 25(3), pages 197-204, September.
    2. Frank Ackerman & Kevin Gallagher, "undated". "Getting the Prices Wrong: The Limits of Market-Based Environmental Policy," GDAE Working Papers 00-05, GDAE, Tufts University.
    3. 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 275-291, May-June.
    4. Brunetti, Celso & Gilbert, Christopher L., 1995. "Metals price volatility, 1972-1995," Resources Policy, Elsevier, vol. 21(4), pages 237-254, December.
    5. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 1-23.
    6. 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.
    7. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, September.
    8. Margaret E. Slade, 1991. "Market Structure, Marketing Method, and Price Instability," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1309-1340.
    9. 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, Southern Agricultural Economics Association, vol. 30(1), pages 1-7, July.
    10. 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.
    11. Laurits Rolf Christensen & Richard E. Caves, 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.
    12. 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.
    13. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, in: A. Mitchell Polinsky & Steven Shavell (ed.), Handbook of Law and Economics, edition 1, volume 1, chapter 8, pages 499-589, Elsevier.
    14. 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.
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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.
    2. 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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