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Teaching Opportunity Cost in an Emissions Permit Experiment

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  • Charles Holt

    ()
    (University of Virginia)

  • Erica Myers

    ()
    (University of California, Berkeley)

  • Markus Wrake

    ()
    (IVL Swedish Environmental Institute)

  • Dallas Burtraw

    ()
    (Resources for the Future)

  • Svante Mandell

    (VTI Swedish National Road and Transport Institute)

Abstract

This paper describes an individual choice experiment that can be used to teach students how to correctly account for opportunity costs in production decisions. Students play the role of producers that require a fuel input and an emissions permit for production. Given fixed market prices, they make production quantity decisions based on their costs. Permits have a constant price throughout the experiment. In one treatment, students have to purchase both a fuel input and an emissions permit for each production unit. In a second treatment, they receive permits for free and any unused permits are sold on their behalf at the permit price. If students correctly incorporate opportunity costs, they will have the same supply function in both treatments. This experiment motivates classroom discussion of opportunity costs and emission permit allocation under cap and trade schemes. The European Union Emissions Trading Scheme (EU ETS) provides a relevant example for classroom discussion, as industry earned significant 'windfall profits' from free allocation of emissions permits in the early phases of the program.

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Bibliographic Info

Article provided by Economics Network, University of Bristol in its journal International Review of Economics Education.

Volume (Year): 9 (2010)
Issue (Month): 2 ()
Pages: 34-42

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Handle: RePEc:che:ireepp:v:9:y:2010:i:2:p:34-42

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  1. Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future.
  2. Markus Wråke & Erica Myers & Dallas Burtraw & Svante Mandell & Charles Holt, 2010. "Opportunity Cost for Free Allocations of Emissions Permits: An Experimental Analysis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 46(3), pages 331-336, July.
  3. Mandell, Svante & Wråke, Markus & Myers, Erica C. & Burtraw, Dallas & Holt, Charles A., 2009. "Pricing Strategies Under Emissions Trading: An Experimental Analysis," Working Papers 2009:1, Swedish National Road & Transport Research Institute (VTI).
  4. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
  5. Kilkenny, Maureen, 2000. "A Classroom Experiment About Tradable Permits," Staff General Research Papers 5241, Iowa State University, Department of Economics.
  6. Lisa R. Anderson & Sarah L. Stafford, 2000. "Choosing Winners and Losers in a Classroom Permit Trading Game," Southern Economic Journal, Southern Economic Association, vol. 67(1), pages 212-219, July.
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