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Teaching Opportunity Cost in an Emissions Permit Experiment

Author

Listed:
  • 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.

Suggested Citation

  • 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.
  • Handle: RePEc:che:ireepp:v:9:y:2010:i:2:p:34-42
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    File URL: http://www.economicsnetwork.ac.uk/iree/v9n2/holt.pdf
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    References listed on IDEAS

    as
    1. Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future.
    2. 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.
    3. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
    4. Maureen Kilkenny, 2000. "A Classroom Experiment about Tradable Permits," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 22(2), pages 586-606.
    5. 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, Springer;European Association of Environmental and Resource Economists, vol. 46(3), pages 331-336, July.
    6. 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.
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    Cited by:

    1. Charles A. Holt, 2011. "Teaching Experimental Economics: Reinforcing Paradigms and Bringing Research into the Undergraduate Classroom," Chapters,in: International Handbook on Teaching and Learning Economics, chapter 47 Edward Elgar Publishing.

    More about this item

    JEL classification:

    • 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 Adoption and Costs; Distributional Effects; Employment Effects

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