Environmental Regulation Simulation

In this experiment, you are all producers of a good that can be sold on the open market for $12 per unit. The good costs nothing to produce, but production results in one unit of pollution per unit produced. There will be a number of decision making periods. In each period, you have the opportunity to produce up to two units of the good. Your goal is to maximize profits. You should keep track of transactions that take place on the attached decision sheet.

Each firm will have a different cost of reducing each unit of emissions (i.e., abatement cost) depending on the technology that the firm employs and the age of its plant. Each firm will be dealt a playing card that represents the abatement cost.

Your production process causes damage to the environment, and hence has been regulated by the Environmental Protection Agency. A benefit-cost analysis has determined that 50% of the total emissions should be eliminated in order to maximize economic efficiency. The following regulatory approaches will be attempted in order to achieve the emissions reduction goal:

Source: Anderson, Lisa, R., and Sarah L. Stafford, "Choosing Winners and Losers in a Classroom Permit Trading Game," Southern Economic Journal, 67(1), 212-219, 2000.