ALEX TABARROK

marvels

I was in Vermont over the weekend and talking to a dairy farmer about the rising price of milk. I was surprised when she said that higher sawdust prices was one of the causes. Sawdust? Sawdust, it turns out, is used for bedding the cows and the price of dust has doubled in the past year. I surmise that the downturn in housing construction has meant a reduced demand for lumber and thus less sawdust.

at the marvelous way that markets for seemingly unrelated products interact and overlap:I found the information about sawdust surprising, as well as the fact that milk prices had gone up. Despite my economic training, I'm terrible at checking prices at the grocery.

Mr Tabarrok then goes a bit too far in his market evangelism:

The economics of sawdust also reminds us that the capitalist production system minimizes waste - entrepreneurs search out ways to extract the most value from every input and from every output. Thus even sawdust, as trivial a waste product as one could imagine, is turned into an input into milk production as well as into particle board, fuel nuggets, mulch and other useful products.

The capitalist production system is excellent at minimising waste products for which it has found a profitable use. It is the case, however, that landfills remain full to the brim with rubbish of all kinds. And of course, markets gladly spew carbon dioxide into the atmosphere, despite the threat such waste poses to the world.

The solution is to place a value on waste products, such that markets have an incentive to do with carbon or rubbish what they currently do with sawdust. But beware—while the interconnectedness of markets will ensure that pricing carbon at the source will result in efficient emission reductions, the policy could redound in surprising ways. The carbon cost of lumber might be high, for instance, leading to new construction technologies that emphasise brick or synthetic materials. Then sawdust might be in permanent short supply, leading to new constraints on milk producers.

But I'm confident that the markets will sort it all out, provided that the right institutional framework is in place.