Mandell, Svante () (Swedish National Road & Transport Research Institute (VTI)) Holt, Chrles (Department of Economics, University of Virginia) Myers, Erica (Resources for the Future) Burtraw, Dallas (Resources for the Future) Wråke, Markus (IVL Swedish Environmental 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 who require a fuel input and an emissions permit for production. Given fixed market prices, they make production quantity decisions on the basis of 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 emissions permit allocation under cap-and-trade schemes. The European Union Emissions Trading Scheme provides a relevant example for classroom discussion, as industry earned significant windfall profits from free allocation of emissions allowances in the early phases of the program.
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Publisher Info
Paper provided by Swedish National Road & Transport Research Institute (VTI) in its series Working Papers with number
2009:6.
Length: 12 pages Date of creation: 25 May 2009 Date of revision: Handle: RePEc:hhs:vtiwps:2009_006
Note: The paper is also part of the RFF discussion paper series. Contact details of provider: Postal: VTI, Transport Economics, P.O. Box 6056, SE-171 06 Solna, Sweden Phone: +46-13-20 40 00 Fax: +46-13-14 14 36 Email: Web page: http://www.vti.se/tek More information through EDIRC
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