Reference no: EM131090940

A homeowner owns a parcel of land bordering the state university's campus. The current fair market value of the homeowner's land is $400,000. The homeowner is interested in determining whether she should invest $25,000 to install a new stone wall around her home, which would raise the fair market value of the home from $400,000 to $430,000. The homeowner is aware that discussions are ongoing in the state legislature to expand the state university's campus. In particular, the legislature is contemplating using its power of eminent domain to seize her property. Suppose the probability her land is seized under eminent domain is 50%. If the land is seized, all structures on her property would be destroyed and a new dormitory would be erected. This new dormitory would create a net benefit to the state of $1,000,000.

From a social perspective, is it efficient for the homeowner to incur the costs of installing a new stone wall around her home? (Enter "Yes" or "No")

Suppose that compensation equals the fair market value of the premises when the state uses its power of eminent domain. Will the homeowner incur the costs of installing a new stone wall? (Enter "Yes" or "No"):

Suppose that compensation is zero when the state uses its power of eminent domain. Will the homeowner incur the costs of installing a new stone wall? (Enter "Yes" or "No"):

Suppose courts are concerned with the possibility that the state may abuse its power of eminent domain when compensation is zero. That is, courts are worried that the state will be undeterred from taking additional parcels of land, even when it is inefficient to do so. What level of compensation ensures the state's decision of whether to exercise its power of eminent domain is efficient?