Buyers and sellers meet in a market—based on the double auction—for RobotDogs. Instructor chooses whether barking creates a negative externality (e.g., noise pollution) or a positive externality (e.g., crime reduction). Instructor can implement a correction for the market failure: tax or tradable permits for negative, or subsidy for positive externality.
The game demonstrates the market failure arising from externalities that are not internalized. It demonstrates policy interventions that can increase surplus: tradable permits or a Pigovian tax in the case of a negative externality; a subsidy in the case of a positive one.