A developer owns a piece of beachfront land that she intends to develop for residential use. The private returns to the developer are as follows:
Return if developed: $50,000
Return if undeveloped: $10,000
Suppose that three nearby residents would sustain damages from beach erosion if the land is developed. Their damages would be as follows:
Resident 1: $20,000
Resident 2: $15,000
Resident 3: $10,000
a.) Is it efficient for the land to be developed?
b.) Suppose that the developer has property rule protection of her right to develop. If bargaining costs between the developer and the
residents are zero, describe the likely outcome.
c.) How does your answer to part (b) change if it costs the three residents a total of $10,000 to organize and act collectively?
d.) How can the government use its regulatory authority to overcome the problem of high bargaining costs?
e.) What amount of compensation should the developer receive if she is prohibited from developing the land and if the development ban is
construed to be a taking?