Question

The owner of a particular house has an unobstructed view of the ocean from his front window. However, the owner of a vacant lot in front of the house announces plans to build a house of his own. Suppose that a one-story house will partially obstruct the view, but a two-story house will block it completely. The builder’s profit and the value of the house are as follows:

# of stories	Profit	Value of view
0	$0	$70,000
1	$100,000	$60,000
2	$150,000	0

a. Is it efficient for the house to be built? If so, how many stories should it be?

Suppose the original owner seeks an injunction halting construction

2. If the court refuses to grant the injunction describe the market outcome if bargaining costs are low. Does the outcome change if bargaining costs are high?

3. Suppose the court grants the injunction, describe the market outcome if bargaining costs are low. Does the outcome change if bargaining costs are high?

Answer 1

a. It can be efficient for the house to be built if it is limited to one-story building or of only ground floor. It can effect the oceanic view of the other building if it exceeds the height of the buliding which is already built. Building up new house in front of the initial house can influence in the owner's rental revenue negatively.

If the court refuses to grant the injunction then ultimately the price of the house already built will go down and the owner will have to make a good bargain in order to attract the customers otherwise he will face a good loss as in this condition the owner's house can be obstructed with the ocean view by the future building which will can loose the customers.

If the court accepts to grant the injunction then certainly the initial owner will have no worry of bargain prices as his house is safe to be priced in good number of coins and can be made to rent according to the owner's wish price as in this condition his house is not obstructed with the ocean view which can add customers to him.