Last week in micro principles I ran the regulation and pollution trading games (the references are at the bottom of the links). These are really one game that takes too long for one class. In the intro classes I skip a bunch of the environmental econ stuff but the scenarios we cover gets the most basic points across.
Student/polluter teams are each given two numbered playing cards where the numbers represent their marginal abatement cost function. For example, a 3 and a 6 represents an increasing MAC function. A pair of fours represent constant MAC.
[And they always laugh at the dirty joke. You explain that the lowest numbers represent the best pollution abaters. Pause and then deliver the punchline. You say: "that's right, if you are holding a low card then you are a master-abater." Everyone between the age of 19 and 44 (and maybe older, but there is little empirical evidence) gets a big kick out it.]
Students can produce up to 2 units of output, production cost = $0, price = $12 (no variation) and each unit of output produces one unit of pollution.
- Scenario #1: No regulation, students raise their hands for each unit of pollution. Lots of hands go up as they are trying to profit (i.e., candy) maximize. The instructor states that a benefit-cost analysis has determined that about half of the pollution should be reduced.
- Scenario #2: Command and control regulation requires that each firm reduce one unit of pollution using the "best available control technology" (i.e., their highest numbered card). They complain which leads us to ...
- Scenario #3: A pollution tax is set so that firms can either pay the tax on their pollution or abate they their pollution. The tax generates the efficient amount of pollution (i.e. raised hands) but it cuts into profits. Students complain which leads us to ...
- Scenario #4: Each firm receives one pollution permit which they can sell. They can also buy a permit in a pit market. Firms with low cards have an incentive to sell their permit (I need to remember to make sure that they sell for a price above their highest MAC). Firms with high cards have an incentive to buy permits (I need to make sure that they buy for a price below their lowest card).
As long as the permits are given away all firms will make more money in Scenario #4 when compared to Scenario #2 and #3. I ask them what so of regulation they prefer, they say cap-and-trade. And then we talk a bit about the political economy and why we'll never see a carbon tax in our lifetime (I'm 95% sure).
Next semester I'm going to do a better job of reporting the data so that all pragmatic env-econ readers will be convinced to take the path of least resistence and accept cap-and-trade over the maybe-preferred carbon tax.
