Is the graph correct in the solution Question A-3a (Bloomberg Congestion case) of the 2007 practice exam? If so, what does the curve shown indicate?
The graph is correct…the curve shown represents the demand for driving in New York…some people value driving in the city a lot, and others not so much, so we get the typical downward sloping demand curve…the supply in this case is drawn as being perfectly elastic, with the original supply curve being a dotted horizontal line at the marginal private cost of driving in the city (gas, etc.) and the marginal social cost is the higher horizontal line. Given this, the graph is just like the externality graphs that you saw in class.