In class, we saw the following example of a revenue neutral tax policy: in an attempt to reduce traffic congestion by cars, drivers are discouraged by having to pay a tax that is transferred to public transit providers as subsidies.

1. Define the marginal cost of driving and the marginal cost of transit and compare them.
2. As seen in class, the fare (price) elasticity for urban public transportation is low and it ranges between -0.1 and -0.7. What effect would a fall in car use have on the amount of the subsidy?
3. Compare private (fully deregulated) transit operators and public transit operators in the transportation sector, in terms of economic and social goals.