Suppose that a new chief of the government agency discussed in Problem 30-7 decides to reduce the supply of pollution allowances. Evaluate the effects this policy change will have on the market price of pollution allowances, and discuss whether the policy appears to be fully consistent with the original intent of creating the market for these allowances.

Problem 30-7

A government agency caps aggregate emissions of an air pollutant within its borders, establishes ini- tial pollution allowances across all firms, and grants the firms the right to trade these allowances among themselves. The demand and supply curves for these pollution allowances have normal shapes and intersect at a positive price. Explain in your own words the government's likely goal in establishing this private market for pollution allowances.