Econ 4th Edition by William McEachern

Exercise 7

(Market for Pollution Rights) The following graph shows the market for pollution rights.
a. If there are no restrictions on pollution, what amount is discharged?
b. What is the quantity supplied and the quantity demanded if the government restricts the amount of discharge to Q* but gives the permits away?
c. Where is market equilibrium if the government sells the permits? Illustrate this on the graph.
d. What happens to market equilibrium if the gvernment reduces the amount of discharge permitted to Q**? Illustrate this on the graph.