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A developer is seeking to increase the allowed density on a parcel of vacant land in a low-density residential neighborhood. Assume that the cost of building a square foot of space is constant at $25. Each built square foot can be sold on the market for $40. The developer is asking to build 15 floors. Each floor is 20,000 square feet. Answer the following questions: (a) The cost of obstructing views, creating shadows and adding to congestion amounts is zero for floors 1 through 5. They are equal to $10 per square foot starting from floor 6 and they increase by $1 for each higher floor (e.g., they are $11 per square foot on floor 7, $12 on floor 8, etc.). What is the socially efficient outcome, that is, the optimal number of floors? How can this be achieved, i.e. what, if any, payments should the developer make? (b) During the public review, it is decided that the developer can build 10 floors to sell on the market and must build an additional 2 to be sold at $20 per square foot. Will the developer go ahead with the project? Is this efficient? [Note: the externality remains the same as in the first question.] (c) After the developer complains, it is decided to make the construction of the 2 additional low-price floors voluntary. If the developer builds them, property taxes on the whole building are zero and, as a consequence, each market-rate square foot fetches $42. What will the developer do? Is this efficient? [Note: the externality remains the same as in the first question.]

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