Lesson Plan

• Describe the concept of pollution permits (cap‑and‑trade) and how they internalise externalities.
• Explain how a cap is set, how permits are allocated (free or auction) and how trading works.
• Calculate the equilibrium permit price and allocation using marginal abatement cost functions.
• Compare pollution permits with taxes, subsidies and command‑and‑control on certainty, cost‑effectiveness and administrative burden.
• Evaluate the main advantages and limitations of a cap‑and‑trade system.

• Projector or interactive whiteboard
• Slide deck on cap‑and‑trade theory
• Printed worksheet with the numerical example
• Calculators or spreadsheet software
• Handout of the policy‑instrument comparison table
• Markers and flip‑chart for group discussion

Begin with a quick poll: “What tools can governments use to curb pollution?” Link responses to previous lessons on externalities and market failure. State that today’s success criteria are to explain cap‑and‑trade, solve a numerical example, and compare it with other instruments.

1. Do‑now (5’) – students answer the poll and list advantages of market‑based approaches.
2. Mini‑lecture (10’) – present the cap‑and‑trade mechanism, cap setting, and allocation methods using slides.
3. Guided practice (15’) – in pairs, work through the numerical example to find the permit price and each firm’s allocation.
4. Group discussion (10’) – compare pollution permits with tax, subsidy, and command‑and‑control using the provided comparison table.
5. Check for understanding (5’) – quick quiz (Kahoot or exit ticket) with three conceptual questions.
6. Reflection (5’) – students write one advantage and one limitation of cap‑and‑trade on a sticky note.

Recap how cap‑and‑trade achieves environmental targets efficiently while requiring careful design. Collect exit tickets as a retrieval check. For homework, read a case study of an existing cap‑and‑trade program and prepare a short critique.