Slide 16 of 16
I think you would agree that you have added value to your neighbors home. Now how will you get that value added to your neighbor’s home when he/she sells it? Will you politely ask for your share at the closing? What is your neighbor likely to tell you? Thus we have what is known as a positive externality.
Now assume you have a neighbor that does not maintain their home site well at all. Your neighbor has junk cars in the back yard on cinder blocks, a goat running around grazing the over grown crabgrass in the yard, and paint peeling off the siding and trim. This would probably diminish the value of your well kept home (negative externality). How would you recover this loss?
Do you now see the rationale behind the development of “Homeowners Associations”, and restrictive covenants that are placed in real estate deeds. These legal instruments are used to preserve and maintain the value of homes in sub-divisions. Zoning ordinances and municipal land use plans are other legal prescriptions for preserving or enhancing real estate values.
Another example of a positive externality is EDUCATION. Higher education leads to increased GDP (economic growth) and lower crime rates.