Question 4 - Driving Taxes vs Public Transport Subsidies Consider driving as a market activity. The Private Marginal Cost of adding 1 driver to the roads is: PMC = 20 + 7 -20 + Q Travel time is given by T. In our model, assume that T - Q . where Q is the total number of drivers on the road. To derive the external cost caused by the Oth driver, use the formula AT x (Q - 1) ECON 320 HW 3 12/07/21 This is the increase in travel time, multiplied by the number of drivers already on the road (n) Show that the equation for Social Marginal Cost is SAIC - 19 + 20 The marginal benefit of adding I more driver is given by SAD - 35 - 20. (b) Show that a road usage charge of $3 would lead to the socially optimal quantity of drivers, If a road usage charge cannot be implemented, an alternative is to subsidize public bus services. Assume that every dollar reduction in public bus prices is equivalent to the same increase in the cost of driving. Demand and supply in the public bus market are given by: (Demand) pp=_ 308 2 (Supply) ps - (e) What amount of subsidy would lead to the socially optimal quantity of drivers? (d) Draw a supply and demand diagram showing the free-market equilibrium ( P*. Q') and the equilibrium after the subsidy is in place ( PD. PS. Q'). You do not need to provide any number valtien