Directions for Playing the Tradable Permits Game
No of students
6 groups of 1 to 5 students per group. Each group represents a firm.
Materials needed
One worksheet and one chart per firm. It is helpful for students to have calculators. It is
useful for the lecturer to have access to a laptop or classroom computer with a
spreadsheet program on it, to facilitate the process of adding up industry totals.
Starting the game
The lecturer gives a worksheet to each firm with its own marginal abatement cost (MAC)
equation given, and a full-page graph of its MAC curve (for students to use as a visual aid
in their problem solving).
1. The game begins by asking the “firms” to suppose they are subject to a uniform
standard (1480 tonnes for each firm, in this example).
 The members of each firm calculate and record the abatement quantity and cost
this standard imposes on their firm.
 The lecturer then collects that information by asking each firm their resulting
abatement levels and abatement costs and adds up industry totals that the students
can fill in on their worksheets. The correct results of that exercise are given in
Table 2.
2. Now the lecturer explains that the policy is instead one of tradable permits. Initial
permit allocations are uniform but permits may be bought and sold. In our example,
each firm was given 1480 permits per firm, with each permit granting the right to
emit one tonne of pollution.
3. The lecturer will act as a market facilitator, with students filling in their worksheets as
the game goes along, as follows.
 The lecturer calls out a price (e.g. £4000 per permit).
 Each firm calculates how many permits it wants to buy or sell at that price.
 The lecturer collects that information from all firms, and adds up the totals. If
total demand equals total supply, that price holds and all firms are allowed to
buy/sell their desired quantities.
 If there is excess supply or demand, the facilitator calls out a new price that is
lower or higher (whichever is appropriate) and the process repeats until the
market clears.
4. Repeat stage 3 until market clears.
If the students do the calculations correctly, the series of prices shown in Table 3
ought to yield some interesting outcomes on the way to the market-clearing price. As
the price adjusts in the correct direction after each round (falling if there is excess
supply, rising if there is excess demand), some firms will find themselves switching
between “buyer” and “seller” status, though the two firms with the highest MAC
curves will want to buy permits at any of the prices listed here.
5. When the market has cleared, students do the calculations on the bottom of the
second page of the worksheet to figure out how much their firms abate, and what the
net cost of abatement is to their firms. Again the lecturer gathers that information and
generates industry-wide tallies of abatement levels and costs. The lecturer also asks
for each firm’s revenue from selling or total cost of buying permits and adds them up.
Net costs of the entire industry (abatement costs less revenue from permit sales) are
then computed by the lecturer. The students put these numbers on their worksheets as
well.
Depending on how quickly the students work and how much time is set aside for this
exercise, there are several easy variants of the game that can be tried. One can reduce the
number of permits issued in total to see what happens to abatement costs and the marketclearing permit price. One can also make the initial allocation of permits non-uniform to
see what happens to the distribution of net abatement costs among firms.
If there is a website for the course, it can be useful to post the “correct” results of the
game for students to review at their leisure. It can also be informative to provide links to
web sites with information about real-world tradable permit programmes.