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Teaching Opportunity Cost in an Emissions Permit Experiment

Author

Listed:
  • Holt, Charles
  • Myers, Erica

    (Resources for the Future)

  • Wråke, Markus
  • Mandell, Svante
  • Burtraw, Dallas

    (Resources for the Future)

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 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.

Suggested Citation

  • 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.
  • Handle: RePEc:rff:dpaper:dp-09-22
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-09-22.pdf
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    References listed on IDEAS

    as
    1. Lisa R. Anderson & Sarah L. Stafford, 2000. "Choosing Winners and Losers in a Classroom Permit Trading Game," Southern Economic Journal, John Wiley & Sons, vol. 67(1), pages 212-219, July.
    2. Maureen Kilkenny, 2000. "A Classroom Experiment about Tradable Permits," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 22(2), pages 586-606.
    3. 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.
    4. 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.
    5. Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future.
    6. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
    7. Bunn, Derek W. & Fezzi, Carlo, 2007. "Interaction of European Carbon Trading and Energy Prices," Climate Change Modelling and Policy Working Papers 9092, Fondazione Eni Enrico Mattei (FEEM).
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Teaching environmental policy to MBAs with Veconlab
      by John Whitehead in Environmental Economics on 2016-02-18 14:41:48

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    Cited by:

    1. Farolfi, Stefano & Erdlenbruch, Katrin, 2020. "A classroom experimental game to improve the understanding of asymmetric common-pool resource dilemmas in irrigation water management," International Review of Economics Education, Elsevier, vol. 35(C).
    2. Charles A. Holt, 2011. "Teaching Experimental Economics: Reinforcing Paradigms and Bringing Research into the Undergraduate Classroom," Chapters, in: Gail M. Hoyt & KimMarie McGoldrick (ed.), International Handbook on Teaching and Learning Economics, chapter 47, Edward Elgar Publishing.

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    More about this item

    Keywords

    opportunity cost; emissions permits; allowance allocation; classroom experiments;
    All these keywords.

    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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