Teaching Opportunity Cost in an Emissions Permit Experiment
AbstractThis 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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Bibliographic InfoPaper 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:
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
Web page: http://www.vti.se/tek
More information through EDIRC
opportunity cost; emissions permits; allowance allocation; classroom experiments;
Other versions of this item:
- Charles Holt & Erica Myers & Markus Wrake & Dallas Burtraw & Svante Mandell, 2010. "Teaching Opportunity Cost in an Emissions Permit Experiment," International Review of Economic Education, Economics Network, University of Bristol, vol. 9(2), pages 34-42.
- Holt, Charles & Myers, Erica & Wråke, Markus & Mandell, Svante & Burtraw, Dallas, 2009. "Teaching Opportunity Cost in an Emissions Permit Experiment," Discussion Papers dp-09-22, Resources For the Future.
- A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-03 (All new papers)
- NEP-EDU-2009-06-03 (Education)
- NEP-ENE-2009-06-03 (Energy Economics)
- NEP-ENV-2009-06-03 (Environmental Economics)
- NEP-EXP-2009-06-03 (Experimental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future.
- Mandell, Svante & Wråke, Markus & Myers, Erica C. & Burtraw, Dallas & Holt, Charles A., 2009.
"Pricing Strategies Under Emissions Trading: An Experimental Analysis,"
2009:1, Swedish National Road & Transport Research Institute (VTI).
- Wråke, Markus & Myers, Erica & Mandell, Svante & Holt, Charles & Burtraw, Dallas, 2008. "Pricing Strategies under Emissions Trading: An Experimental Analysis," Discussion Papers dp-08-49, Resources For the Future.
- Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
- 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.
- Kilkenny, Maureen, 2000. "A Classroom Experiment About Tradable Permits," Staff General Research Papers 5241, Iowa State University, Department of Economics.
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