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Consider the market for footballs. Suppose the demand for footballs is given by F = 50 P − 1. (1) Suppose further that the marginal private cost of producing footballs is $10 per football. Also assume that pollution from the leather tanning process is generated in proportion to the number of footballs made. The external marginal damage from the pollution is $15 per football produced.
a) Suppose the football market is competitive. What price will the market generate, and how many footballs will be produced/consumed?
b) In the outcome in a), calculate i) consumer surplus, ii) producer surplus, and iii) total surplus. Now consider the possibility that each football produced generates a di?erent external marginal cost. We can represent the new MEC as MEC(F) = 2F (2)
c) Given this external cost, calculate total surplus.
d) Suppose the ?rm producing footballs acted as if the external cost was their own (inter-nalizing the externality). Calculate i. The new market equilibrium ii. Consumer surplus iii. Producer surplus iv. Total surplus
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