### Games Economists Play: Games 71 - 80

Game: #71
Course: Micro
Level: Principles and up
Subject(s): An experiment on externality rights
Objective: Illustrate issues associated with property rights, externalities, and the Coase Theorem.
Reference and contact: Stodder, Jim. "An Experiment on Externality Rights." Classroom Expernomics, 5(1), Spring 1996, pp. 5-7; stodder@mstr.hgc.edu
Abstract: Students are paired up and assigned the role of a BarBQer or a Neighbor. A BarBQer likes to cook (and create smoke) while a Neighbor doesn’t like to breathe smoke. Half the class is informed that Neighbors have the right to zero smoke, while the other half is informed that BarBQers have the right to maximum smoke. The payoffs to each person depends on the level of smoke:
 Smoke From BarBQ 0 1 2 3 BarBQer’s Total Value \$0 \$30 \$50 \$60 Neighbor’s Total Value \$35 \$30 \$20 \$0 BarBQer + Neighbor Value \$35 \$60 \$70 \$60

Each pair proceeds to negotiate a satisfactory bargain.

Class size: Any number.
Time: 30 – 45 minutes.
Variations: Introduce a payoff structure that has two peaks (say, by making Neighbor’s value equal \$75 when smoke is zero) and observe the difficulties this presents private negotiation. Also, you can easily demonstrate a ‘public’ externality by having two large groups that must negotiate over the appropriate level of smoke.

Game: #72
Course: Micro, law & economics, public finance
Level: Principles and up
Subject(s): Coase Theorem
Objective: Illustrate issues associated with property rights and the Coase Theorem.
Reference and contact: Delemeester, Greg and John Neral. Classroom Experiments: A User's Guide. Boston: Houghton Mifflin, 1995. (Experiment #16)
Abstract: Students are paired together in order to jointly select a number in which the payoffs to each are inversely correlated.
 Number A's Payoff B's Payoff 0 \$0.00 \$12.00 1 4.00 10.00 2 6.00 6.00 3 8.00 4.00 4 9.00 2.00 5 10.00 1.00 6 11.00 0.00

At the beginning of each decision making period, one of the students is randomly chosen to be the ‘controller.’ The controller may unilaterally choose the number thereby ending the decision making process. On the other hand, the other participant may attempt to influence the controller by offering to pay part or all of her earnings to the controller. The pareto optimal outcome is for number 1 to be chosen. The ‘controller rational’ outcome would have the controller receive the lion's share of the joint \$14. A frequently observed alternative outcome is for an equal split of the \$14.

Class size: Any number.
Time: 30 – 45 minutes.
Variations: None indicated.

 Game: #73 Course: Micro Level: Principles and up Subject(s): Market for pollution permits. Objective: Demonstrate the role of tradable permits in reducing the cost of pollution abatement. Reference and contact: O'Sullivan, Arthur and Steven N. Sheffrin. Economics. Upper Saddle River, New Jersey: Prentice Hall, 1997 (pp. 311-312); arthur.osullivan@orst.edu; smsheffrin@ucdavis.edu Abstract: The class is divided into small groups of students (3 to 5) representing paper firms. Each firm is provided data about the firm's production costs as it depends on the amount of waste generated. Each firm receives three pollution permits and is able to buy or sell one permit per trading period. Firms attempt to maximize their profits: profit = (price of paper - production cost) + (revenue from permit sold - cost of permit purchased). Play occurs over five trading periods. During periods four and five, several students are selected to represent environmental groups and are given a fixed amount of money in order to buy permits so as to reduce as much waste as possible. Class size: 10 to 50. Time: One class period. Variations: None indicated beyond the introduction of the environmental groups in periods four and five See also: Externality games

 Game: #74 Course: Micro, public economics, environmental economics Level: Principles and up Subject(s): EPA-Style auction of pollution permits Objective: To demonstrate the cost savings from using a market-based approach versus requiring an across-the-board cut in emissions. Reference and contact: Hazlett, Denise. "An EPA-Style Auction of Pollution Permits." Classroom Expernomics, 4(1), Spring 1995; hazlett@whitman.edu Abstract: Students take on the roles of polluting electric utilities faced with a pollution permit system. Each polluter has information on their own firm’s marginal product of output, marginal cost of production, marginal cost of pollution abatement, and the market price of electricity. Each utility initially emits 500 tons of pollution. A permit system is introduced in which each polluter must obtain a permit for every 100 tons of emissions. The total number of permits available is such that industry emissions will be cut by 60%. Each utility initially receives two permits with the remaining permits auctioned off by the EPA (instructor). After all permits are distributed, a secondary market in permits is opened. Students keep track of their transactions and profits for later discussion. Class size: 10 students (with larger numbers handled through teams). Time: One class period. Variations: A group of students can be assigned the role of an environmental group that is able to buy and ‘retire’ permits. See also: Externality games

 Game: #75 Course: Micro Level: Principles and up Subject(s): Environmental and natural resource economics Objective: To illustrate the over-harvesting tendencies of a common-property resource. Reference and contact: Hazlett, Denise. "A Common Property Experiment with a Renewable Resource." Economic Inquiry, 35, October 1997, pp. 858-861; hazlett@whitman.edu Abstract: Students jointly own a renewable resource and must make harvesting decisions over a number of periods under three treatments. "A plate of M&Ms serves as the resource. At the beginning of the first period the plate holds a number of M&Ms equal to 10 times the number of students in the class. This amount of M&Ms constitutes the plate's carrying capacity, so the plate can at no point hold more M&Ms. In each period, each student privately writes down the number of M&Ms he or she desires to harvest." No student can harvest more than 20 M&Ms in any one period. If, after students reveal their desired harvest simultaneously and publicly, the "total desired harvest is less than or equal to the number of M&Ms on the plate, then each person takes their desired harvest." If the total desired harvest exceeds the number of M&Ms on the plate, then each student gets a prorate share of the total harvest. The M&Ms left on the plate after harvest will reproduce, provided a viable population remains, which is at least 8 M&Ms. If a viable population remains, then each M&M has one offspring, so that the total M&Ms on the plate will double (if the carrying capacity permits). After reproduction, another period begins. If less than 8 M&Ms remain after a harvest, the population crashes, and the experiment ends. Otherwise, the experiment continues for a predetermined (though unknown to the students) number of periods. No communication is allowed between students. The second experiment allows communication. The third experiment designates a portion of the plate as the private property of each student. Each portion of the plate has a carrying capacity of 10 M&Ms. The experiment proceeds as before. Class size: Any size. Large classes can be divided into various group sizes as an additional treatment variable. Time: One class period. Variations: Implement other over-harvesting solutions such as legal limits, taxes, and subsidies. Try anonymous harvest announcements or fixed, known number of periods to change the dynamics. See also: Common pool games

 Game: #76 Course: Micro Level: Principles and up Subject(s): Environmental and natural resource economics Objective: To illustrate the ‘tragedy of the commons’ phenomena. Reference and contact: Ortmann, Andreas and David Colander. Experiments in Teaching and in Understanding Economics. Burr Ridge, IL: Irwin, 1995. (Experiment #3) Abstract: A group of students are asked to form a half-circle around a hypothetical sea. Objects (paper clips) representing ‘small fish’ are placed in the sea along with a single ‘big fish’ (set of keys). Each student is told that they will have two chances to retrieve the objects and that they will be compensated for doing so. Each small fish earns 10 cents in the first period and 20 cents in the second period. The big fish is worth 25 cents in the first period and 50 cents in the second period. Upon the instructor's command, each student will have 20 seconds to ‘fish’ during the first period. The second period begins immediately after the first period and also lasts for 20 seconds. Invariably, ‘overfishing’ is quickly observed as all the objects are retrieved during the first period. Class size: Six to eight students per group. Time: One class period. Variations: None indicated. See also: Common pool games

 Game: #77 Course: Micro, statistics Level: Intermediate and up Subject(s): Bayes’ Rule Objective: To learn how to make predictions using Bayes' Rule Reference and contact: Holt, Charles A. and Lisa R. Anderson. "Classroom Games: Understanding Bayes' Rule." Journal of Economic Perspectives, 10(2), Spring 1996, pp. 179-187; cah2k@virginia.edu Abstract: Students are shown an actual draw of a colored marble from one of two hidden cups. Each cup contains two marbles of one color and one of the other. Students are asked to make a prediction from which cup they believe the marble was drawn. A small monetary reward for a correct prediction is used for motivation. The students generally learn to approximate Bayes' Rule in making their predictions by adjusting the marble counts to reflect prior probabilities. Class size: 10 to 50 students. Time: 30 minutes. Variations: None indicated. See also: Information games

 Game: #78 Course: Micro, upper level electives Level: Principles and up Subject(s): Information cascades Objective: Illustrates how individual decisions may be influenced by both private information and decisions made by other individuals. Reference and contact: Anderson, Lisa R. and Charles A. Holt. "Classroom Games: Information Cascades." Journal of Economic Perspectives, 10(4), Fall 1996, pp. 187-193; cah2k@virginia.edu Abstract: Students are engaged in a sequential prediction game in which they receive private information on which to make predictions about an uncertain event. Student decisions are public information and may influence individual decisions in later sequences of the game. The game is set up so that students must draw a marble from one of two different urns. Each urn has three marbles inside. Urn A contains two dark marbles and one light marble. Urn B contains two light marbles and one dark marble. After a marble is drawn from the unknown urn, each student must make a prediction as to which urn they believe they have drawn from. As Anderson and Holt note, "a pattern of conformity can arise if initial predictions coincide and the inferred information dominates the private information of subsequent decision makers" (p. 188). The game can be used to illustrate, for example, a job search situation in which an employer rejects an applicant simply because others have rejected the applicant. Thus, negative information builds upon itself and reinforces previous decisions made by others in a cascading fashion. Discussion can focus on other examples of bandwagon effects. Class size: 10 to 50 students. Time: One class period. Variations: The basic generic setup can be made more concrete by specifying the decisions in terms of a job search game or a product quality game. See also: Information games

 Game: #79 Course: Macro Level: Principles and up Subject(s): Inflation. Objective: Illustrates how inflation can reduce the information contained in prices. Reference and contact: O'Sullivan, Arthur and Steven N. Sheffrin. Economics. Upper Saddle River, New Jersey: Prentice Hall, 1997 (pp. 328-329); arthur.osullivan@orst.edu; smsheffrin@ucdavis.edu Abstract: Students play the role of firms who must make production decisions based on a known output price and an unknown production costs. Firms receive a price between 5 and 15 for their product. Firms must then decide whether to produce 1 unit or nothing at all. Their cost of production, however, is random and is determined by a predetermined set of probabilities. After learning their production cost, students calculate their profits. Those with negative profit are declared bankrupt and are dropped from the game. The game is played for three periods. The game is then replayed for three rounds using a different set of production cost probabilities reflecting the impact of inflation. Class size: Any size. Time: Less than one class period. Variations: None indicated beyond the change in production cost probabilities. See also: Inflation and interest rate games

 Game: #80 Course: Macro Level: Principles and up Subject(s): Money supply creation. Objective: To demonstrate the process of money creation. Reference and contact: Cameron, Norman E. "Simulating Money Supply Creation in Class," Economic Inquiry, 35, July 1997, pp. 686-693; cameron@umanitoba.ca Abstract: Three simultaneous markets operate to illustrate the money creation process. Students are divided into bankers, loan customers, and business firms while the instructor serves as the central bank. Loan customers are randomly assigned loan projects with varying projected rates of return which serve as their reservation values in the loan market. Business firms are randomly assigned scenarios which specify the minimum proportion of any extra sales revenue that the firm must keep in cash or in demand deposits. The games begins by having the instructor (as central bank) inject extra reserves into the system. Bankers attempt to loan the extra reserves to loan customers in the (pit auction) loan market. The newly financed loan customers proceed to the business firm zone to buy whatever project was just financed. The business firm must then satisfy the firm's portfolio requirements as specified in their scenario by going to the bankers to negotiate terms for depositing any excess cash in a term or demand deposit. The banker must then satisfy the specified reserve requirements. The above process continues until all excess reserves are depleted. Class size: 15 to 50. Time: 75 minutes; a 50 minute class might require shifting the discussion of rules to the prior class and some of the debriefing to the following class. Variations: Two versions are discussed, a simple version along with the more structured version discussed above. See also: Money games

 Games 1 - 10 Games 11 - 20 Games 21 - 30 Games 31 - 40 Games 41 - 50 Games 51 - 60 Games 61 - 70 Games 71 - 80 Games 81 - 90 Games 91 - 100 Games 101 - 110 Games 111 - 120 Games 121 - 130 Games 131 - 140 Games 141 - 150 Games 151 - 160

Games Economists Play

 Copyright 2000 by Greg Delemeester and Jurgen Brauer Last Updated: 02/20/2005