Question 3. Externalities

Paul owns a home on the top of a hill and enjoys an unobstructed view of a large, wooded area. The view was a large factor in his decision to buy the house and Paul values his view to $5,000. Sid purchases the undeveloped wooded area with plans to build a retail shopping center. Sid expects to earn $10,000 from the shopping center, which is $3,000 more than his next best alternative. (Do not consider the change in value of housing in the case of selling, since Paul never would sell his house, no matter how many shopping centers there are around it).

a.What is the difference between the values P receives from the view and his payment for the view?

b.What is the most Paul would offer Sid to prevent construction of the shopping center?

c.What is the least Sid would accept to cease construction of the shopping center?

d.Would it be efficient to stop the construction?

e.Suppose that building the shopping center and receiving $10,000 per month was $6,000 more than sids next best alternative. Would it be efficient to stop the construction? explain