IDEAS home Printed from
   My bibliography  Save this article

The tradable pollution permit exercise: Three additional tools


  • McPherson, Michael A.
  • Nieswiadomy, Michael L.


Permit trading has been a significant innovation in controlling pollution. Ando and Harrington (2006) developed a classroom exercise demonstrating the effectiveness of a tradable permits market. We provide three additional pedagogical tools. First, we show how intermediate microeconomics students can algebraically and graphically calculate the market-clearing permit price. Second, for advanced students we show how the cost-minimizing allocation of pollution control is achieved using a Lagrangian equation and explain the economic interpretation of the shadow price. Third, we show how to solve the first order conditions using Excel's matrix inverse tool for each firm's emissions reductions and the shadow price.

Suggested Citation

  • McPherson, Michael A. & Nieswiadomy, Michael L., 2014. "The tradable pollution permit exercise: Three additional tools," International Review of Economics Education, Elsevier, vol. 15(C), pages 51-59.
  • Handle: RePEc:eee:ireced:v:15:y:2014:i:c:p:51-59
    DOI: 10.1016/j.iree.2013.05.001

    Download full text from publisher

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item


    Classroom experiments; Pollution permits; Lagrangian; Excel;

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • A23 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Graduate
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ireced:v:15:y:2014:i:c:p:51-59. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.