Suppose that next year the government fixes the number of pollution permits at a quantity less than the number sold this year. If nothing else changes, next year the price of a pollution permit will be
A) greater than the price of a permit this year.
B) less than the price of a permit this year.
C) equal to the price of a permit this year.
D) equal to the price set by the government.

Question

Quizplus · Accepted Answer

If the number of pollution permits is fixed at a quantity less than the number sold this year, it means that there will be a shortage of pollution permits in the market next year. This shortage will drive up the price of pollution permits as firms compete to get their hands on the limited supply. As a result, next year the price of a pollution permit will be greater than the price of a permit this year.

Suppose That Next Year the Government Fixes the Number of Pollution