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

  • Frank Ackerman

    (The Global Development And Environment Institute at Tufts Universty)

  • Kevin Gallagher

    (The Global Development And Environment Institute at Tufts Universty)

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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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
Contact details of provider: Web page: http://128.118.178.162

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  1. 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.
  2. 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.
  3. Frank Ackerman & Kevin Gallagher, 2001. "Getting the Prices Wrong: The Limits of Market-Based Environmental Policy," Development and Comp Systems 0106005, EconWPA.
  4. 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.
  5. Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Development Studies.
  6. 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.
  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. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
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