A player can't decline a raise. It's either Fold/Call/Reraise. There's no Decline button online. In your case, player 2 would lose everything since he folded.

Player 2 would have to throw in another $50 into the side pot to keep playing, making the side pot $100 and the main pot $300. If player 2 beat both the other players, he would take down all $400. If player 1 beat both players, he would take down the main pot of $300, but the sidepot is only decided between players 2 and 3.

So yes Player 3 should be rewarded with all the money, since player 2 did not call his reraise (assuming player 3 beat player 1)