Consider the demand for private vehicle miles traveled (VMTs) in the United States. Suppose that the marginal private cost of driving is increasing in VMTs according to MPC=0.2+0.1X, where MPC is measured in dollars and X is VMTs measured in TRILLIONS. The Demand for VMTs is given by 5-1.5X. In addition to these private costs, there are environmental and other external costs. These can be represented by a MARGINAL EXTERNAL COST which is MEC=.05+.3X.

a. Graph this situation. What is the equilibrium number of VMTs in the United States in this model?

b. What is the efficient number of VMTs in the United States in this model? What is the DWL associated with VMTs in the United States?

c. What is the efficient Pigouvian tax per VMT? How much revenue would such a tax raise?

d. Assuming we achieve the efficient outcome through a Pigouvian tax, what is the remaining dollar amount of environmental damage from VMTs? Is this a Pareto Improvement? Why?