Teaching Opportunity Cost in an Emissions Permit Experiment
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.
|Date of creation:||25 May 2009|
|Date of revision:|
|Note:||The paper is also part of the RFF discussion paper series.|
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- 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.
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- Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
- Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future.
- 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.
- Maureen Kilkenny, 2000.
"A Classroom Experiment about Tradable Permits,"
Review of Agricultural Economics,
Agricultural and Applied Economics Association, vol. 22(2), pages 586-606.
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