Cap-and-trade
A government decides to introduce a Cap-and-trade system to reduce carbon emissions. The government distributes 700 million permits to firms, where each pemit allows the holder to emit one ton of CO2.
a) Sketch the supply and demand for emission permits. I'm not providing you with any information on demand, so just sketch any reasonable demand curve.
b) Qualitatively, what will happen to the price of permits if the government increases the number of permits available? Illustrate graphically.
c) Suppose the government decides to introduce a minimum price of 5$ per permit. Will that have any impact on the permit price? Show graphically how your answer depends on the demand for permits.