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2. While the bicycle tire market may be free from some of the concerns found in the market for snow tires, the production of these rubber tires creates pollution as a by-product. Suppose that these bicycle tires, which have production costs totaling $40 per tire, are being sold in a perfectly competitive market. Furthermore, suppose that for each tire that is produced, society faces $10 in costs from pollution. Aggregate demand for bicycle tires is shown in the graph below. a) What is the market equilibrium quantity and price for bicycle tires? At the equilibrium, what is producer surplus? And consumer surplus? What is the aggregate social surplus and what is the cost of pollution at the equilibrium? Show these areas on a graph like the one below and solve for them numerically as well. b) What is the efficient quantity of bicycle tires? And the efficient price? What are the producer surplus and consumer surplus under this outcome? What are the costs of pollution and aggregate social surplus? Again, show these areas graphically and also solve for them numerically. c) What area on the graph represents society's aggregate willingness to pay for a government policy that enforces that exactly 145 bicycle tires are produced? Numerically, what is society's willingness to pay for such a policy? Who would gain from? d) How do your answers to parts a) through c) help explain why it can be difficult to achieve political support for government regulation of a market-produced negative externality? 90 50 MSC 40 MC D 140 175