A: A small squishes a small to a “zero” i.e. non-existent, and moves in.

See the note in the rules about what happens if a medium is squished when no smalls are available: the medium is destroyed, and the squisher moves in. Imagine there simply isn’t a “zero pip” piece in the bank for the small to shrink to (because there’s not!) and you get the same result: the squished small is destroyed and the squisher moves in.