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Iceland - Northern Lights?

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After reading a wonderful post on the top 100 things to do in Iceland, we are ready to plan a trip. Questions:
1. When is the best time to go to see the Northern Lights? Can you see them in Aug/Sept?
2. Hotel Borg any good? Is there a hotel at Blue Lagoon and is it worth a few nights?
3. Rent a car or take public transportation? Are private drivers readily available?
Thanks!

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