Buyers and sellers meet in a market—based on the double auction—for RobotDogs. The instructor chooses whether barking creates a negative externality (e.g., noise pollution) or a positive externality (e.g., crime reduction). You can then implement a correction for the market failure: tax or tradable permits for a negative externality, or subsidy for a positive externality.
The equilibrium of a competitive market without interventions for an externality-generating good is inefficient. There are too many transactions in the case of a negative externality, and too few in the case of positive.
By reducing transactions, a tax can increase efficiency (total surplus) in a competitive market for a good generating a negative externality. By increasing transactions, a subsidy can increase surplus in a competitive market for a good generating a positive externality.
By reducing transactions and ultimately allocating the right to consume to the highest willingness to pay, tradable permits can increase efficiency in a competitive market for a good generating a negative externality.
This game uses the same double auction as MobLab’s Competitive Market game. Students are randomly and evenly split into buyers and sellers. With Unit/Person > 1, buyers have decreasing marginal valuation and sellers increasing cost. A buyer can submit a Bid, while a seller can submit an Ask. A transaction occurs at the highest Bid if a seller presses Sell at Highest Bid or submits an Ask lower than the highest Bid. A transaction occurs at the lowest Ask if a buyer presses Buy at Lowest Ask or submits a Bid higher than the lowest Ask.
When a transaction is completed, a student can attempt to transact her next unit. In a market without government policy, a student's payoff for the round is her surplus from the units she transacts.
The default parameters (Group Size=16; Unit/Person=2, demand curve ranging from $6.00 to $3.00 and supply from $2.00 to $5.00) result in an equilibrium quantity of 10 for negative externalities and 11 for positive externalities (with no policy in place). Note that the supply/demand curve are in fact shifted up/down by Externality/Group Size as the sellers and buyers internalize their own personal benefit/cost. This also means that the delta between marginal personal and marginal society curves is equal to Externality/Group Size*(Group Size-2). By default, the Externality is negative in the Amount of $1.60 per transaction resulting in a reasonable difference between equilibrium and efficient quantities (6 for negative, 14 for positive).
As the nuisance or benefit from each RobotDog is split evenly amongst all Group Members, the default impact is $0.10 per person per dog transacted. This will generally be seen as sufficiently small and will not materially impact the decision to transact.
Especially with students experienced with MobLab’s double auction, you should see market prices converge to the equilibrium prediction in the second round.
Finally, if you change the externality or the supply and demand curves in the Basic panel (or even Group Size or Unit/Person), click Supply/Demand Graph to view the resulting market.
Setting Policy to tax implements a per-unit tax equal to the marginal external cost, which in equilibrium results in the efficient quantity. Likewise, the per-unit subsidy equals the marginal external benefit. To make it clear that efficiency is enhanced, each student outside of the transaction receives an equal portion of the taxes collected at the end of the round (or pays an equal portion of the subsidies distributed).
Setting Policy to Permits allocates tradable permits equal to the efficient quantity. A buyer needs a permit for each RobotDog she purchases. To make payoffs more equal (and to increase activity in the permit market), initial permit allocation is skewed to sellers with the highest cost and buyers with the lowest value. The permit market uses a double auction similar to the RobotDog market. Becuase of the complexity interacting with two markets at the same time (a RobotDog market and a permit market), it is advisable to increase Round Duration.
Without any intervention, the market should converge to the inefficient equilibrium (which does not take into account the external cost or benefit from the externality).
Use the Go To option to toggle between periods in a multi-period game. Click the Compare button to facilitate side-by-side comparison of two games within the same playlist. This is a great way to compare students' outcomes from a market with no intervention to one with a corrective intervention. The Results display is divided into three tabs: the Graphs, Tables, and Raw Data. Tables contains key statistics about each group's performance and decision making, while Graphs contains graphs depicting each group's market activities.
In each period, there are two charts for the selected group (Figure 2). On the left, we show the supply and demand graph. By default there is a divergence between marginal private cost and marginal social cost by the size of per RobotDog external cost minus the personal external cost. The rational being that the individual already factors the externality cost to themselves into their own private marginal cost. On the right, we plot transaction prices (vertical axis) across time (horizontal axis). The graph plotting transaction prices will contain two dotted lines to show the equilibrium price level and the social optimum price level. You can add/subtract this predicted price by clicking on the item in the legend. To change which group's results are displayed, scroll down.
If you set up a permit market in the parameters, we additionally display under the regular supply and demand section, a graph depicting the final permit allocation and the transaction chart for the permit market. The final permit allocation displays the buyers who ended up owning permits (horizontal axis) and their respective values (vertical axis). The permit transaction chart follows the same logic as the supply and demand chart transaction chart.
In out table section, we present three separate tables. The first shows the parameter of the game. The second summarize market outcomes by group (Figure 1) such as the number of transactions, average price, and market efficiency. The third table displays all revelant information on welfare measures such as total surplus, buyer surplus, seller surplus, external surplus, and government surplus.
In out raw data section, we present two separate tables for each group. The first shows the shows the actual transaction in the RogotDog Market. The second disaplys the transaction in the Permit Market (if applicable).
Our robot (i.e., an automated player) strategies for each role are the following (absent/including tradable permits):
When tradable permits are included in the market, robot strategies are different. When the game begins, permits are distributed. Some buyers and some sellers will be given permits. This leads to four scenarios for robots, whose strategies are as follows: