The Pollution Game: A Classroom Exercise Demonstrating the Relative Effectiveness of Emissions Taxes and Tradable Permits

This classroom game illustrates the strengths and weaknesses of various regulatory frameworks aimed at internalizing negative externalities from pollution. Specifically, the game divides students into three groups—a government regulatory agency and two polluting firms—and allows them to work through a system of uniform command-and-control regulation, a tradable emissions permit framework, and an emissions tax. Students observe how flexible, market-oriented regulatory frameworks can outperform inflexible command-and-control. More important, given the ongoing debate about how best to regulate carbon dioxide emissions, students also can observe how the introduction of abatement-cost uncertainty can cause one market-oriented solution to outperform another.