Recently, Bridgestone's Firestone tires have been found to be at risk to fail. The tread may separate from the tire. The problem emerged overseas in the Middle East, Asia, and South America before becoming evident in the U.S. Tread separation problems have occurred mainly with Ford Explorers.

The number of deaths caused by the failure of Firestone tires keeps mounting. By September 1, 2000, 88 deaths in the U.S. and 46 in Venezuela had been tied to the tires, as well as 250 injuries.

The dangerous types of tires have been recalled by Bridgestone. Although it says that the problem is a tire issue, not a vehicle issue, Ford is replacing the tires on its Explorers. Both companies have expressed their sorrow at the consequences of the tire deficiencies. Venezuela's consumer protection agency is recommending that criminal charges be filed against both Bridgestone and Ford.

(Updated October 1, 2000)

1.
a) What is meant by the term "private costs"?
b) What are private costs in the Firestone tire market?
c) What is meant by the term "social costs"?
d) What are social costs in the Firestone tire market?

2.
a) Draw a diagram of the market for Firestone tires. Show the marginal private cost curve and the marginal private benefit curve. Mark the private equilibrium price and quantity.
b) Now draw the marginal social cost curve. Explain its relationship to the private cost curve.
c) What is the implication for the socially optimal price and quantity of Firestone tires?

3.
a) Venezuela is advocating the filing of criminal charges. What economic actions could be adopted to ensure that the socially optimal quantity of Firestone tires are produced and sold?
b) Bridgestone is already reducing the quantity of tires toward the socially optimal level. What economic considerations do you think are prompting Bridgestone to recall the problematic tires? Relate your answer to your diagram.