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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Resources For the Future in its series Discussion Papers with number dp-09-22.
Date of creation: 21 May 2009
Date of revision:
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.
- Mandell, Svante & Holt, Chrles & Myers, Erica & Burtraw, Dallas & Wråke, Markus, 2009. "Teaching Opportunity Cost in an Emissions Permit Experiment," Working Papers 2009:6, Swedish National Road & Transport Research Institute (VTI).
- 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-2009-12-19 (All new papers)
- NEP-ENE-2009-12-19 (Energy Economics)
- NEP-ENV-2009-12-19 (Environmental Economics)
- NEP-EXP-2009-12-19 (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.:
- Wråke, Markus & Myers, Erica & Mandell, Svante & Holt, Charles & Burtraw, Dallas, 2008.
"Pricing Strategies under Emissions Trading: An Experimental Analysis,"
dp-08-49, 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," Working Papers 2009:1, Swedish National Road & Transport Research Institute (VTI).
- 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.
- 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.
- Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster).
If references are entirely missing, you can add them using this form.