Question

Suppose the equilibrium price of MARTA rides is $2.00 and the equilibrium quantity of MARTA rides...

Suppose the equilibrium price of MARTA rides is $2.00 and the equilibrium quantity of MARTA rides is 20,000 rides.

a. Draw a supply and demand graph illustrating this scenario for Atlanta’s MARTA system. Label everything on your graph.

b. If the price of bus rides (a substitute for MARTA rides) increased, what would happen to your supply and demand picture? Label everything on your graph. Show this change on a new graph below. What happened to equilibrium quantity and price?

c. If MARTA creates a negative externality due to its pollution content, then is equilibrium quantity too high or too low according to society? Draw this graph below and label everything.

d.   If the city realizes that due to the pollution, the socially optimum number of rides is 10,000 rides per month, then what size tax should the city place on the MARTA system per ride? Note: At a price of $3.00/ride, quantity demanded for rides is 10,000 rides. Label everything on your graph.

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