groups pressure the local government to reduce the number of

groups pressure the local government to reduce the number of pollution rights to be sold. Other things equal, Suppose en 0 a, the price of pollution rights would fall and the amount of pollution would decrease Ob. pollution would not be affected Oc. the price of pollution rights would fall and the amount of pollution would increase Od. the price of pollution rights would rise and the amount of pollution would increase e. the price of pollution rights would rise and the amount of pollution would decrease

Solution

Option e

If the overall quantity of pollution rights fall, then the firms in the market will have little choice but to decrease the pollution level. Note that earlier they could buy the rights from market and pollute. With decline in pollution rights, the supply for pollution rights will shrink and hence their price will also increase.