Consider the market for studded snow tires. Industry demand is given by P = 170 - 5Q, where Q is the number of tires in thousands and P is the price per tire in dollars. Studded tires are supplied in a competitive market at an average cost of $60 per tire.
a. Determine the competitive price and quantity of studded tires.
b. Over their lifetimes, studded tires cause considerable road damage. The best estimate of total road damage is C = .25Q2:
c. Consequently, the marginal cost of an extra studded tire on the road is given by MC = .5Q. Accounting for this road damage, a regulator seeks to determine the quantity of tires that will maximize net social benefit.
Find this quantity. At this quantity, what is the resulting market price? Compute the net social benefit.
d. By what regulatory means could this outcome be obtained? Explain.
e. Suppose firms can manufacture low-impact studded tires that do negligible road damage at an extra cost of $12 per tire. Assuming optimal regulation, as in part (b) or part (c), which type of tire will be produced? Explain.