App State has become quick to cancel classes with the buses won't run. When that happens we are asked to "winterize" our courses. In other words, we're supposed to keep the students busy while they are enjoying no class time. My go to assignment has been Veconlab's supply and opportunity cost experiment. Here is the abstract from Mandell et al. (2009):
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.
Mandell, Svante, Chrles Holt, Erica Myers, Dallas Burtraw, and Markus Wråke. Teaching Opportunity Cost in an Emissions Permit Experiment. RFF-DP-09-22, 2009.
My MBA managerial economics class missed last wednesday and monday and so I fielded and debriefed the experiment on those days.
If students recognize the opportunity cost of free permits then the cap-and-trade and emissions tax regimes should result in the same supply curve. This doesn't happen for all of the students so the supply curve is too high for profit maximization when permits are freely distributed. Here is the estimated supply curve (OLS with random effects, n = 23, t = 16), quantity ranges from 0 to 3, price ranges from 1 to 10 and tax is equal to 0 for cap-and-trade and 1 for the tax regime:
Here is my pre-experiment video:
And here is my post-experiment video:
And just so you know, the Watauga County kids are going to school today for the first time in 8 days.
