Your friend owns a home and also owns a vacant lot (of about 10 acres) next to t
ID: 1140259 • Letter: Y
Question
Your friend owns a home and also owns a vacant lot (of about 10 acres) next to this home. Your friend has owned the home and vacant lot for 20 years. You tell your friend that it must be quite costly to have that lot as vacant land. Your friend says the vacant lot is not costly. She continues by saying that the only cost is annual mowing of the weeds and the property tax (which is low since the land was bought 20 years ago). Please explain if your friend is correct in her view of the cost of that vacant lot.
Explanation / Answer
My friend is not correct in her estimation of the cost associated with the vacant lot. It can be understood by one example. If my friend would have given the vacant lot on rent that is supposedly $5000 per acre, then she would be earning the rent of $50000 per year for the 20 years that is not yet earned by her. So, the cost of vacant lot is $50000 per year, I am trying to explain her. So, it is not only the explicit cost of property tax and cost of mowing the land, but also the implicit cost of $50000 per year as benefits foregone by my friend. So, the vacant lot owned by my friend is very costly in nature and she must use it for some productive purposes or give it on a rent to get some profit and never let cost (implicit) to accrue.
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