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(Table: Property Values)

A local university is located in a residential neighborhood. Property rights are clearly defined for both the residents of the neighborhood and the university. The university would like to build a five-level parking garage on its property, but the neighbors argue that it will create too many nuisances and thus hurt their property values. The table contains data on the parking fee revenue the university expects to earn, as well as the expected impact on average neighborhood property values.

According to the Coase theorem, the optimum level of floors in the parking garage should be:

\begin{tabular}{|l|l|l|}
\hline
Number of Levels & Parking Fee Revenue & Average Property Value in the Neighborhood \\
\hline
0 & [tex]$\$[/tex] 0.00[tex]$ & $[/tex]\[tex]$ 310,000.00$[/tex] \\
\hline
1 & [tex]$\$[/tex] 50,000.00[tex]$ & $[/tex]\[tex]$ 305,000.00$[/tex] \\
\hline
2 & [tex]$\$[/tex] 90,000.00[tex]$ & $[/tex]\[tex]$ 295,000.00$[/tex] \\
\hline
3 & [tex]$\$[/tex] 120,000.00[tex]$ & $[/tex]\[tex]$ 280,000.00$[/tex] \\
\hline
4 & [tex]$\$[/tex] 140,000.00[tex]$ & $[/tex]\[tex]$ 260,000.00$[/tex] \\
\hline
5 & [tex]$\$[/tex] 150,000.00[tex]$ & $[/tex]\[tex]$ 235,000.00$[/tex] \\
\hline
\end{tabular}

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Answer :

GinnyAnswer
Let's analyze the given data to find the optimum level of floors in the proposed parking garage according to the Coase theorem.

Here is the information you provided:

| Number of Levels | Parking Fee Revenue | Average Property Value in the Neighborhood |
|-----------------|---------------------|-------------------------------------------|
| 0 | \[tex]$0.00 | \$[/tex]310,000.00 |
| 1 | \[tex]$50,000.00 | \$[/tex]305,000.00 |
| 2 | \[tex]$90,000.00 | \$[/tex]295,000.00 |
| 3 | \[tex]$120,000.00 | \$[/tex]280,000.00 |
| 4 | \[tex]$140,000.00 | \$[/tex]260,000.00 |
| 5 | \[tex]$150,000.00 | \$[/tex]235,000.00 |

To determine the optimal number of floors, we need to calculate the net benefit for each scenario. The net benefits can be calculated as follows: For each level, subtract the loss in property value from the parking fee revenue.

Let's break it down into steps:

1. Calculate the property value decrease compared to the value when there are no parking levels.
2. Calculate the net benefit for each number of levels.
3. Identify the number of levels with the highest net benefit.

### Step-by-Step Calculation:

1. Calculate the loss in property value compared to no construction (0 levels, which keeps the property value at \[tex]$310,000). For 1 level: \( \$[/tex]310,000 - \[tex]$305,000 = \$[/tex]5,000 \)
For 2 levels: [tex]\( \$310,000 - \$295,000 = \$15,000 \)[/tex]
For 3 levels: [tex]\( \$310,000 - \$280,000 = \$30,000 \)[/tex]
For 4 levels: [tex]\( \$310,000 - \$260,000 = \$50,000 \)[/tex]
For 5 levels: [tex]\( \$310,000 - \$235,000 = \$75,000 \)[/tex]

2. Calculate the net benefit for each number of levels by subtracting the property value loss from the parking fee revenue.

For 0 levels: [tex]\( \$0 - \$0 = \$0 \)[/tex]
For 1 level: [tex]\( \$50,000 - \$5,000 = \$45,000 \)[/tex]
For 2 levels: [tex]\( \$90,000 - \$15,000 = \$75,000 \)[/tex]
For 3 levels: [tex]\( \$120,000 - \$30,000 = \$90,000 \)[/tex]
For 4 levels: [tex]\( \$140,000 - \$50,000 = \$90,000 \)[/tex]
For 5 levels: [tex]\( \$150,000 - \$75,000 = \$75,000 \)[/tex]

3. Summarize the net benefits:

| Number of Levels | Net Benefit |
|-----------------|-------------|
| 0 | \[tex]$0 | | 1 | \$[/tex]45,000 |
| 2 | \[tex]$75,000 | | 3 | \$[/tex]90,000 |
| 4 | \[tex]$90,000 | | 5 | \$[/tex]75,000 |

4. Identify the maximum net benefit:

The highest net benefit is \[tex]$90,000, which occurs for both 3 and 4 levels. ### Conclusion: The optimum number of floors for the parking garage, according to the Coase theorem (which focuses on maximizing net benefits), is either 3 or 4 levels, as both levels yield the highest net benefit of \$[/tex]90,000.

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