Friday, April 20, 2012

Holy Bologna: A back of the envelope calculation

I saw this on the Colbert Report last night, so I had to look up the motivation.  Here's an excerpt from a news article on the bust.
This is a prohibited product because it is made from pork and has the potential for introducing foreign animal diseases to the U.S. pork industry, “said Gomez.  
Authorities say Mexican bologna is sometimes resold in other parts of the country at deli counters in small grocery stores that cater to immigrants or on the black market. This batch of baloney was not refrigerated and also could have posed a health risk for consumers.
The man who tried to sneak the baloney across the border in his truck is a 33-year-old resident of Ciudad Juarez, Mexico. He was fined $1,000 and released. The contraband bologna was seized by CBP and destroyed.
When would this meat smuggling be worth it? According to Mary Mervis Deli, the cheapest bologna on the menu is $3.99/pound.  Suppose that's what Mexican bologna could fetch, and guess that the wholesale cost is about $2/pound (so that $2/pound of bologna is revenue - cost).  This time, the guy was busted with approximately 400 pounds of bologna.  

Suppose that he's going to be caught smuggling meat one out of two times.  For each of the successful trip, he makes $800 in excess of costs.  For the unsuccessful trip, he loses $800 in "product" and is fined an additional $1000.  For these three trips, he makes a loss of $1000 (profit =  $800 - $1000 - $800 = -$1000).  So, it wouldn't be worth it if these are the prices and the probabilities.

Moreover, repeat offenses likely come with increasing fines.  Also, it is awfully inconvenient to be arrested, yet I ignored these opportunity costs.  Despite all of these costs, people "regularly" try to smuggle meat across the border.  In practice, this means that meat smuggling must still be worth it.  What does this imply about smuggling meat?  Either the likelihood of getting caught must be lower than 1/2, or this is some high value bologna.

Even in the high value bologna case, fix the one in two chance of getting caught and suppose that the bologna could go for $10/pound, keeping a markup of half of the retail price.  Then, each shipment of 400 pounds could sell for $2000, and the profit would be $2000 - $1000 - $2000 = -$1000.  As you can see, for higher quality goods, a key ingredient to the enforcement policy is destroying the product, but the effectiveness depends on catching the smugglers in the first place.  Given that this is a persistent problem, a 50 percent success rate at catching bologna smugglers is likely too optimistic.

1 comment:

  1. I watched the story and my brain got working on this too.

    The cartels must have found a way to conceal drugs in the Bologna, either chemically or away from view.

    I can't believe this isn't being tested.
    Cartels have buckets of money to throw at research.


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