Teaching Opportunity Cost in an Emissions Permit Experiment

Charles Holt, Erica Myers, Markus Wråke, Svante Mandell and Dallas Burtraw

RFF Working Paper Series from 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.

Keywords: opportunity cost; emissions permits; allowance allocation; classroom experiments (search for similar items in EconPapers)
JEL-codes: A22 C90 Q52 (search for similar items in EconPapers)
Date: 2009-05-21
New Economics Papers: this item is included in nep-ene, nep-env and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Teaching Opportunity Cost in an Emissions Permit Experiment (2010)
Working Paper: Teaching Opportunity Cost in an Emissions Permit Experiment (2009)
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