The main road in a small town is particularly prone to congestion. When the road is empty, drivers like to use the road to quicken their journey times, but journey costs rise with the number of other users. Specifically, the cost of using the road (in terms of the value of time and fuel costs) when the nth user joins the road is given by MC(n) = 4n where n is the number of other vehicles currently using the road and MC() represents the marginal (private) cost. The demand curve for the road is given by D(p) = 60 p

(a) [5 marks] Define the concept of negative externality. Explain very briefly why driving on the road causes a negative externality.

(b) [5 marks] Explain briefly why the marginal benefit of driving is given by the demand curve. If drivers arrive at the road in decreasing order of who values the road most, what is the marginal benefit for the 3rd driver on the road?

(c) [5 marks] As the rate of change of the marginal cost is given by 4, explain why the marginal externality is 4 in this case.

(d) [5 marks] Using the marginal benefit and marginal private cost curves, compute the laissezfaire equilibrium number of vehicles taking the road. What is the socially efficient number of vehicles? (We allow for fractions of vehicles in the answer.)

(e) [5 marks] What is the optimal unit charge to use the road? Does the optimal charge increase in periods of higher demand? Explain why or why not.