Suppose that a gas station plans to begin operation on a vacant parcel of land l

Question

Suppose that a gas station plans to begin operation on a vacant parcel of land located in a residential neighborhood. The extra profit the station will earn at this location compared to its next best location is $500, but it will also impose an external cost of $10 on each of one hundred nearby residents.

a) Is it efficient for the station to locate in the residential area?

b) Two possible ways for the station owner and residents to resolve the externality are: (1) for the residents to organize and buy the property and then resell it to a residential user; or (2) for one or more of the residents to bring a nuisance suit to have the station shut down. Explain why each of these solutions is unlikely to work in this case.

c) Use your answer to (b) to justify zoning ordinances used by most cities to segregate incompatible land uses.

Explanation / Answer

a) No,it is not efficient for the station to locate in the residential area. As for this may be the profit may be $500 but as it imposes $10,on each of the one hundred resident ,resident would not be interested in paying extra for the same ,as it does not a profitable as per customer orientation.So it is profitable as per company point of view, but atlast to be efficient it should be customer oriented

b)No, among these two ways (1) for the residents to organize and buy the property and then resell it to a residential user; or (2) for one or more of the residents to bring a nuisance suit to have the station shut down. Both the solution is unlikely to work on this case,as for the first case just to shut down ,to buy the property and then resell is not feasible,as the it would be a risk to get that value and for the second case,it is not proper to shut down as it to shutdown the station does not solve their problem.

c)To justify zoning ordinances used by most cities to segregate incompatible land uses-The primary purpose of zoning is to segregate uses that are thought to be incompatible. In practice, zoning also is used to prevent new development from interfering with existing uses and/or to preserve the "character" of a community. However, it has not always been an effective method for achieving this goal

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