Suppose Douglas and Ziffel have properties that adjoin the farm of Mr. Haney. The current zoning law permits Haney to use the farm for any purpose. Haney has decided to raise pigs (the best use of the land). A pig farm will earn $50,000 per year, forever.
a. Assume the interest rate is 10 percent per year. What is Haney’s pig farm worth?
b. Suppose the next best use of Haney’s property is residential, where it could earn $20,000 per year. What is the minimum one-time payment Haney would accept to agree to restrict his land for residential use forever?
c. Suppose Douglas is willing to pay $200,000 for an end to pig farming on Haney’s land, while Ziffel is willing to pay no more than $150,000. (For some reason, Ziffel does not mind pig farming as much as Douglas does.) If Douglas pays Haney $200,000 and Ziffel pays Haney $150,000, and Haney converts his land to residential use, is this a Pareto improvement? Who benefits, who loses, and by how much?
d. Suppose instead that Douglas pays $150,000 and Ziffel pays $150,000. Is this move a Pareto improvement? Who benefits, who loses, and by how much?