Consider a city where the owners of vacant lots will vote on a proposed growth boundary. There are 12 vacant lots (one per owner), four inside the proposed boundary and eight outside the boundary. Currently, the initial price of land is $20,000 per lot for all lots (as none are developed yet). The growth boundary will reduce the price of land outside the boundary to zero (since no future development will be permitted).
(a) If the growth boundary doubles the prices of lots within the boundary, what is the change in the total value of land? If this was the expected result, would a vote of lot owners pass this growth boundary law?
(b) If the growth boundary quadruples the prices of lots within the boundary, what is the change in the total value of land? If this was the expected result, would a vote of lot owners pass this growth boundary law? Is there a Pareto improving (at least for the landowners) solution that could lead to this being passed?
(c) Now suppose the city combines the proposed growth boundary with capital gains equal to 80% in the change in the value of the land. The revenue of the tax will be redistributed in equal shares to the landowners outside the boundary. What is the minimum price increase that would need to result to fully compensate these landowners? Separately, suppose the prices of lots quadruple as in part (b). What would the capital gains tax need to be to fully compensate landowners outside the boundary?
Consider a city where the owners of vacant lots will vote on a proposed growth boundary. There are 12 vacant lots (one per owner), four inside the proposed boundary and eight outside the boundary. Currently, the initial price of land is $20,000 per lot for all lots (as none are developed yet). The growth boundary will reduce the price of land outside the boundary to zero (since no future development will be permitted).
(a) If the growth boundary doubles the prices of lots within the boundary, what is the change in the total value of land? If this was the expected result, would a vote of lot owners pass this growth boundary law?
(b) If the growth boundary quadruples the prices of lots within the boundary, what is the change in the total value of land? If this was the expected result, would a vote of lot owners pass this growth boundary law? Is there a Pareto improving (at least for the landowners) solution that could lead to this being passed?
(c) Now suppose the city combines the proposed growth boundary with capital gains equal to 80% in the change in the value of the land. The revenue of the tax will be redistributed in equal shares to the landowners outside the boundary. What is the minimum price increase that would need to result to fully compensate these landowners? Separately, suppose the prices of lots quadruple as in part (b). What would the capital gains tax need to be to fully compensate landowners outside the boundary?
