NASA and The Private Sector

NASAOver the past 50 years, the majority of space research and exploration has been initiated through the government.  However, in recent years the United States has begun transitioning away from this trend. Private companies are starting to enter a new market: space exploration. These “New Space” companies have a lot to offer but also bring some downsides

The emergence of these companies is largely due to NASA’s Commercial Orbital Transport Services Program (COTS) was starting in 2006 and subsidized commercial firms for the development and testing of a spacecraft that could replace the space shuttle.

The program was such a success because it removed many of the barriers to entry that existed in the emerging market. In addition, the program acted as a sort of fiscal policy.  Most of the $700 million dollars spent stayed within the US and created serious jobs for the US economy.  Funding these firms has jumpstarted the market to lead the world in this emerging industry.  More than 20 businesses applied for the COTS Program. The contenders were eventually narrowed to Boeing, SpaceX, and Sierra Nevada. 

By awarding more than one company the contract NASA encouraged competition. In the past, both Boeing and Lockheed Martin have held near monopolies on some aspects of the demand (such as launching military satellites).  As a result of their strong grasp on the market, Boeing has been able to charge high prices for its products.  Now, these monopolies are beginning to crumble as NASA shifts its funding toward awarding contracts and relying more heavily on commercial industry. Consequently, companies like SpaceX, Sierra Nevada, Blue Orbit, and Boeing now compete for federal funding and contracts. By enabling competition (through reducing the cost to entry for many space startups like SpaceX), market forces have driven down prices and incentivized firms to find ways to get to space cheaper and faster than NASA ever could. Private firms are iss-wallpaperincreasingly looking to NASA to fund their own missions and development.  For example, just recently, SpaceX and Boeing received US government contract to deliver astronauts to the International Space Station (ISS).  Planetary Resources are working towards mining near-earth astroids and astroids in the astroid belt.

spacex-latino

NASA’s role has obviously changed. Part of the government agency has become a sort of regulator/consumer for a market by issuing licenses and contracts to private firms. However, some aspects of space exploration aren’t yet practical for businesses to pursue.  Thus, National Space Programs have narrowed their mission to invest in areas of space exploration where profits aren’t yet realistic or fit for commercial endeavors. 

Their are also some downsides that come from an increased reliance on the private sector.  A lack of experience makes reliance on these firms more risky both in terms of safety and as an economic investment thus many people are not interested in funding dicy business plans that haven’t been proven in the market. In addition, the way our space program is structured would place the profit motive ahead of the research motive for all space missions, possibly making the missions less scientifically efficient.

In conclusion, we find that though private space companies help with two hugely important things: development of new technologies and lower costs.  By investing in the formation of these companies the United States is pushing our industry to the forefront of an emerging market, all the while creating good jobs and fostering innovation.

-Eric Rannestad

References:

“NASA vs. the Free Market: Which Is Better for American Space Dominance?” Digital Trends. 31 Aug. 2012. Web. 6 May 2015.

“Taxi to Orbit: NASA Goes with Old Space and New Space (with a Cameo by Jeff Bezos).” Washington Post. The Washington Post. Web. 6 May 2015.

Cuadra, Alberto, and Katie Park, Published: Nov. 22, 2013. “New Players in the Space Race.” Washington Post. The Washington Post. Web. 6 May 2015.

http://www.bloomberg.com/news/articles/2014-04-28/elon-musk-challenges-lockheed-boeing-rocket-monopoly

http://www.forbes.com/sites/forbesleadershipforum/2013/10/02/houston-we-have-a-market-privatizing-space-launches-pays-off-big/

Advertisements

The Economics of Trash

Trash is a fundamental economic concept.  In today’s society everyone produces huge amounts of trash through consumption of goods and services. In fact, on average Americans generate over 700kg of the stuff every year.  This statistic is problematic because of the huge environmental impact that much trash has on the earth’s resources and climate.  This begs the question: what determines what can be recycled and what is trash.  Part of the answer to this question is scientific.  Some waste simply isn’t recyclable due to the composition of the waste.  The other part of the answer can be found when we examine the economics of it all.

trash-clackamas-river-cleanupjpg-98f3b65de5b67a28

Recycling is a business.  Like any business there are costs to the production, and there is a demand for the product of the production. Now, because recycling is a business, it must be economically viable, these firms must make a profit.  Some materials, though they are recyclable, have too high a processing cost to make their recycling profitable.

MSW-G-and-R-1024x576-1

(Though the percentage of recyclable materials have been going up, not all of the material is being recycled)

Plastic bags are an example of a recyclable material that is on the edge of what is recyclable and what is not. To understand why plastic bags are on this line of a recyclable item and a landfill item, we have to examine cost of producing a new plastic bag.  Plastic bags are made of low quality plastic and therefore, are typically cheap to produce.  Furthermore, the production of this plastic is related in production to the petroleum industry.  When the cost of petroleum decreases significantly, the cost of producing a new plastic bag does as well. Recently, the petroleum industry has been doing just this. Because new low-quality plastic has become so cheap to produce, recycling firms can’t compete with their competitor’s prices.

In fact, this has been happening to a lot of recyclable products, not just plastic bags.  Recycling has taken a huge hit in the past few years.  Private firms have been going out of business all over the United States because of dropping prices of the newly produced substitutes.  This drop in recycling has a significant environmental impact that could be avoided, begging the question: How can we ensure that everything that can be recycled gets recycled? Are government controlled recycling centers more likely to process collected recyclable materials? Currently the private sector for trash collection is beyond 50 percent.  Is it worth taxpayer money to subsidize these recycling centers to ensure they are doing everything they can?

-Eric Rannestad

Sources:

http://www.npr.org/blogs/money/2015/03/27/395815221/episode-613-trash

—- ^ great podcast, you all should take a listen.

http://waste360.com/collection-and-transfer/private-benjamins-debate-over-privatizing-waste-collection?page=3

http://www.economist.com/node/13184704?zid=313&ah=fe2aac0b11adef572d67aed9273b6e55

The Ski Industry and The Great Snow God

Snow, it’s the most essential component of a great day of skiing.   Before retiring each night, ski bums around the world perform their sacred rituals and intimately pray to the great snow god.  But regardless of their pleas, this mighty god only blankets regions of the world upon his own desire.  The accumulation of snow is reliant upon weather — an inconsistent, unpredictable, and uncontrollable variable.  How then can a business remain profitable if its most essential component is dependent upon the erratic behavior of the snow god?  In the winter of 2012, Colorado was experiencing the worst snow drought since the 1980’s.  Andy Katz, CEO of Vail (one of North America’s largest resorts) commented upon the drought, “For the first time in 30 years, a lack of snow has not allowed us to open the back bowls in Vail.” (ClimateProgress.org) Snowfall totals had fallen more than 80 percent from the 525 inches the mountain had received the year earlier.  However, even with such a dramatic lack of snow Vail’s visits were down only 15 percent and, “even more surprising, annual revenue hadn’t declined at all.” (TheAtlantic.com).  If weather can be so inconsistent, and snow, so unpredictable, how then can a business hold such consistent revenue?  That the answer lies in diversification of products and services.

NoSnow

Though skiing may be the primary motive of a visitor, getting those visitors actually skiing on the mountain is not the primary aim of many resorts.  If a resort’s business model is heavily reliant upon their costumers buying lift tickets and skiing, it becomes incredibly risky.  If such a resort experiences a winter like Colorado’s in 2012 than their total visitors would plummet alongside total revenue.   When we examine many large successful resorts in the United States and Canada they hold one glaring similarity: a village that offers a variety of products and services.  Restaurants, spas, tours, and shops of all kinds line cobblestone sidewalks. This keeps revenue constant to counter variable amounts of snow.  This decreases the elasticity of a ski resort’s demand with respect to weather. For this to occur, a resort’s business model must draw costumers for more reasons than skiing alone.

whistler-village-in-the-winter

Another way resorts hold revenue relatively inelastic with respect to weather is by “owning the skiers” (TheAtlantic.com) Vail’s season pass costs $700.  This price is the equivalent of seven day tickets.  By buying a season pass, the skier is now a reliable costumer of the resort regardless of snowfall.  But wouldn’t the resort lose money if season passes are valued at seven days on the slopes and many of their owners ski fifteen or more days a year?  It turns out that these skiers have committed to a resort regardless of weather which further detaches a resorts connection to weather. “Just under 40 percent of our lift tickets come from season passes sold before the ski season begins,” the CEO of Vail said.  Also, by investing in a loyal base of skiers, these returning costumers are now renting from that resorts equipment, buying their food, and staying in their hotels. Mountains like Vail and Whistler own all key lodging, rentals, snow school, and food locations therefore monopolizing their own base villages (Much like how sporting events, festivals, amusement parks, and casinos can charge high prices because of the lack of competition).

Screen Shot 2015-03-02 at 1.40.15 AMScreen Shot 2015-03-02 at 1.40.23 AM (TheAtlantic.com)

With services outside of ticket sales generating about 50% of both resorts revenue, even when costumers get a cheap pass to ski on the mountain, they’re still using many of Whistler and Vail’s other product and services. Many of these resorts use real estate as well to lessen their business’ dependence on weather even further.  This technique of getting people to the mountain holds many similarities as the season pass.  If people have a place to stay at a resort they will have already invested money and committed to staying at the resort.  It is investment made by the resort to “own the skier”.  If a resort gives a costumer a great deal on a condo, the resort may not make money immediately, but now that costumer has committed to spending time at the resort where they will ski, eat, and shop and ultimately do these things regardless of how much snow falls from the sky.  Kevin Smith (CEO of Whistler Blackcomb), explains how offering these season passes and real estate packages help Whistler: “If families pre-commit to a package that includes lift tickets, lodging, and ski school, we lock up that business before the snow falls.” (TheAtlantic.com) Now when a resort diversifies their products and services in these ways and make costumers commit to their resort before the snow falls than they turn their industry from an elastic one to a relatively inelastic one.  By doing so they become less susceptible to the wrath and tantrums of the almighty snow god.

Works Cited:

Thompson, Derek. “No Business Like Snow Business: The Economics of Big Ski Resorts.” The Atlantic. Atlantic Media Company, 7 Feb. 2012. Web. 2 Mar. 2015. <http://www.theatlantic.com/business/archive/2012/02/no-business-like-snow-business-the-economics-of-big-ski-resorts/252180/&gt;.

“Snow Drought Forces Colorado to Face Frightening New Climate-change Reality.” The Colorado Independent. 9 Jan. 2012. Web. 2 Mar. 2015. <http://www.coloradoindependent.com/109613/snow-drought-forces-colorado-to-face-frightening-new-climate-change-reality&gt;.

“Colorado Sees Worst Snow Drought Since Early 1980s, Foreshadowing Water Shortages And Potential Wildfires.” ThinkProgress RSS. 9 Jan. 2012. Web. 2 Mar. 2015. <http://thinkprogress.org/green/2012/01/09/401077/colorado-sees-worst-snow-drought-since-early-1980s-foreshadowing-water-shortages-and-potential-wildfires/&gt;.