Why might a profitable motel shut down in the long run?
Why might a profitable motel shut down in the long run if the land on which it is located becomes extremely valuable due to surrounding economic development? What kinds of costs are involved in making a decision to shut down?
Economic growth could bring financial prosperity to a region but it also has environmental implications. It could disturb the ecosystem of a certain region by increasing pollution, around which many local businesses may revolve (Brock & Taylor, 2005). In the case of a motel which is profitable, we may assume that its customers come from different places to enjoy the region or the environment. With economic growth, more industries may be established in the region which may disturb the ecosystem. The region may become less attractive for nature lovers and would use its utility. Eventually the number of customers may decrease to a level where the costs becomes more than the income of the motel and a decision is made for it to be shut down.
As mentioned in the details, the land had become extremely expensive. With time, the owner of the motel might find it more profitable to liquefy the motel and spend the cash on opening more than one motels in other areas. The owner already have experience of running a motel.
Economic development in the region may encourage other people to open their own motels. Before the economic development, the motels did not have a competitor and suddenly there are competitors which may introduce better packages and facilities. This could attract even the loyal customers of the old motel and slowly the motel may lose its customers calling for the closure of the motel.
There are legal costs associated with shutting down a business. You might need to hire a lawyer or pay other shut down fees when you decide to shut down a business. Shifting different items present at the motel or selling them for a lower price is also a shutdown cost.
Brock, W. A., & Taylor, M. S. (2005). Economic growth and the environment: a review of theory and empirics. Handbook of economic growth, 1, 1749-1821.