A Second Hand Conjecture

As I’m sure I’ve mentioned on more than one occasion, my morning and evening commutes are usually accompanied by NPR news programming. The leftist bent is grating at times, but the production values are quite high, and I do enjoy some of the off-beat stories from time to time. However, one thing that routinely leaves me in traffic-stopping, head-scratching mode is the rank ignorance that pervades many a story with respect to basic economics.

For example, after the iPhone was released a few weeks ago NPR’s coverage matched the tech world’s hysteria, reporting almost daily on different aspects of the fun, new gadget. Predictably, part of that coverage including someone complaining about the price and the hype, lamenting the fact that we Americans are so caught up in our consumerism that we’ll pay inflated prices for things we don’t need. The head-scratching part came when this commentator declared that people who waited in line to buy two, three or more phones, just so they could turn around and sell them on eBay, sometimes at double the price, were creating an “artifical demand” for the iPhone. “Artificial demand”? What is that exactly? If Person B is willing to pay $700 for an iPhone that retails for $500, he can stand in line and wait in order to get the lower price, or pay Person A, who is willing to stand in line, for the higher price. How does meeting someone’s demand price by doing the legwork yourself create an “artificial demand?” It doesn’t, because their is no such thing outside of a monopoly (e.g. where the sole seller requires the purchasers to buy “extras” that they do not need), fraudulent pump-and-dump type schemes, or government mandates. Sale of iPhones, even on the secondary market, does not fit into any of those categories.

And just this morning I heard another head-scratcher in a report on recycling plastics.

Companies that reclaim the plastic resin from empty beverage bottles say they can’t get enough of the stuff. However, fewer than one-quarter of the billions of plastic bottles Americans purchase every year are recycled.

[...]

Public recycling bins of any kind are rare in the United States, but the industry that recycles the bottles’ plastic resin, known as PET, is hungry for more to make fabric, carpets and new bottles, says Michael Schedler of the National Association for PET Container Resources.

“The demand is almost bottomless at this point,” Schedler says. “There’s so much new demand coming on and existing demand can’t be met.”

How is the demand “bottomless” you ask? Well, another way to put it is that supply is severely limited. I don’t know much about the business of using reclaimed PET, but my guess is that it is only slightly less expensive for a manufacturer to acquire than purchasing brand new PET from a petro-chemical factory. I wouldn’t be surprised if there is a direct government subsidy involved as well, meaning that the true cost of using recycled PET is likely higher than getting the fresh stuff. The reason that the demand for recycled PET is “almost bottomless” therefore, is because the buyers are getting it under a price-ceiling regime, which means that someone else is absorbing the costs.

The NPR story actually quotes some of those who bear these costs, such as grocers in states with deposit laws:

The 11 states with bottle bills account for more than 60 percent of the PET plastic recycled in the United States. But many grocers are against deposits.

“It’s somewhat dirty, it’s inconvenient and it actually costs us money,” says Ken Capano, who owns two ShopRite stores in Connecticut.

Capano says the deposit law in his state places too much of the burden of recycling on grocers, who have to provide space and machines to take the bottles back. It costs each of his stores about $20,000 a year, he says.

Because the grocer doesn’t sell the bottles to the recycle plant or the manufacturer using recycled PET, he has no ability to set a price on that product. In fact, the grocer is forced to pay for maintaining recycling centers, for which he receives no compensation. Similarly, consumers are forced to pay extra for their drinks, which extra they likely eat up in lost gas money and time when the go to get their deposit refunded. In other words, the grocers and the consumers are subsidizing the recycling plant and the manufacturer who buy recycled PET.

Actually, the most damning evidence that “bottomless demand” is due to buyers not bearing the cost is that no entrepreneurs are out there paying people for their recyclable materials. If demand was really as high as claimed in the NPR story, then the buyers would begin offering more money for recyclables (in economic lingo, a market-clearing price would be offered). That they don’t do this, and that others are forced to subsidize the buyers, underscores the suspicion that the true costs of using recycled materials are higher than buying brand new PET.

And if that wasn’t enough, one tell-tale sign that recycling is a government created market is when there are special interests exempted from the costs of the program:

Kim Jeffrey, president and CEO of Nestle Waters North America, says he’s not against container deposits, but he says beverages should not be the only containers targeted.

“Everybody that sells a plastic container that’s recyclable should have some deposit on it if we’re going to do this thing the right way,” Jeffrey says.

And he means everybody.

“If it’s P&G with a detergent container; if it’s ConAgra with a peanut butter container; or if it’s me with a bottled water container; or if it’s a dairy with a one-gallon milk container — this should be a level playing field on this,” Jeffrey says.

Milk production is one of the most protected industries in our nation, so it’s no surprise that it would get an exemption. I can’t say why laundry detergent manufacturers get a pass, except that perhaps it is too easy for them to switch their product to a non-recyclable container. Either way, it seems pretty clear that without the govern-mandates and subsidies that recycling would not exist nearly anywhere.

So when Mr. Schedler complains about bottomless demand, he is really complaining about not enough government interference, since that is the only way he will ever get the supply he needs at the artificially low price he expects.

Technorati Tags: economics, artificial demand, iPhone, artificial prices, recycling, NPR, bottle-bills, supply and demand

No Comments »

Trackback URI | Comments RSS