The effects of environmental policy on city's labor demand and supply. Assume that a new environmental policy is accepted, which requires firms to cut back their pollution. This will result in an increased cost of production. In the class example we assumed that the environmental policy would only affect labor demand. Now, we will consider the effects on labor supply as well as demand. a) (0.5 points) Draw the changes in the urban labor and demand curves, if the shift in demand is smaller than the shift in supply