Suppose that a gas station plans to begin operation on a vacant parcel of land located in a residential neighborhood. The extra profit the station will earn at this location compared to its next best location is $500, but it will also impose an external cost of $10 on each of one hundred nearby residents.
(a) Is it efficient for the station to locate in the residential area?
(b) Two possible ways for the station owner and residents to resolve the externality are: (1) for the residents to organize and buy the property and then resell it to a residential user; or (2) for one or more of the residents to bring a nuisance suit to have the station shut down. Explain why each of these solutions is unlikely to work in this case.
(c) Use your answer to (b) to justify zoning ordinances used by most cities to segregate incompatible land uses.