Working Papers, Swedish National Road & Transport Research Institute (VTI)
Teaching Opportunity Cost in an Emissions Permit Experiment
(), Chrles Holt, Erica Myers, Dallas Burtraw and Markus Wråke
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; (follow links to similar papers)
JEL-Codes: A22; C90; Q52; (follow links to similar papers)
12 pages, May 25, 2009
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