I'm running the Anderson and Stafford (SEJ, 2000) pollution permit trading game in my MBA class (managerial economics) tonight. Here are my discussion questions (taken from the 2000 paper):
- What is the effect of regulation (output restrictions, pollution permits) on profits? Is this bad for the economy?
- What is the effect of permit trading on profits, relative to regulation?
- If you bought a permit, why? Use this information to draw the permit demand curve.
- If you sold a permit, why? Use this information to draw the permit supply curve.
- Does demand and supply change when permits are allocated in different ways (random allocation, rewarding new tech firms, rewarding old tech firms, auctions)? [We also ran the Veconlab permit experiment. Results are here and here. One of these graphs shows that it doesn't matter whether you are given your permits or must pay for them, each allocation mechanism generates an opportunity cost for the permit.]
- Does demand and supply help explain permit trading (i.e., price and quantity)?
Next, we'll run the abatement subsidy and pollution tax scenarios and have an in-class final exam (where teams of students turn in answers and teams can discuss their answers with teams). The in-class "final" is worth 3.33% of their grade.
- What would happen to permit price and quantity if environmental groups were allowed to enter the permit market and they are willing to pay greater than market price? What would happen to the amount of pollution? Draw a diagram to support your answer.
- What would happen to permit price and quanity if the government decided there was still too much pollution and reduced the number of permits? What would happen to the amount of pollution? Draw a diagram to support your answer.
- As the manager of your firm, which sort of regulation do you most prefer? Why? How much money would you be willing to spend to lobby the government for it? Can you see any long run problems with this sort of regulation (i.e., from society's perspective)?
- As the manager of your firm, which sort of regulation do you least prefer? Why? How much money would you be willing to spend to lobby the government to avoid it?
- Describe the differences in the effects of the permit market on your firm from the (a) free allocation of permits and (b) auctioning of permits. What other sort of regulation that we simulated is the auction most like? Explain.