Teaching price formation using a cap and trade game (External case study)

Published in The Journal of Economic Education by Stefano Carattini, Georgia State University; Eli P. Fenichel, Yale Unviersity; Alexander Gordan, Georgia State University; and Patrick Gourley, University of New Haven; November 2019


“Cap and trade” is one of the most innovative policy options developed by environmental economists. By placing a cap on a social bad and allowing firms to buy and sell the right to generate it, policymakers combine government intervention with market-based incentives to improve welfare and internalize the externality. Such programs represent a great opportunity for instructors to show students how economic theory is used in the real world. Students can learn several important tenets of economics by playing an in-class game based on musical chairs, which creates a market for pollution using a mobile app or paper-based interaction. This active learning method engages students and improves comprehension of price formation, gains from trade, voluntary response to incentives, and an important environmental policy.


Full article in JEE (paywalled)