Please see attached file for full problem description and chart.
a. If there are no restrictions on pollution, what will be the amount of discharge?
b. What will be 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 government reduces the amount of permitted discharge to Q**? Illustrate this on the graph.
The solution answers the question(s) below regarding externalities.