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About Neighborhood Effects

About Neighborhood Effects

Sometimes it is infeasible to charge others for benefits that they derive from your actions. If you clean up your yard, it may add value to your neighbors’ homes, but it would be pretty difficult to charge them for it. As a consequence, your yard may be inefficiently unkempt.

Similarly, it is sometimes infeasible to charge another not to do something. Your neighbor’s collection of lawn gnomes may detract from the value of your entire neighborhood, but it might be difficult for all those affected to bribe him to take it down. As a result, there may be too many yard gnomes.

Economists call it a “positive externality” or a “positive neighborhood effect” when it is infeasible to charge others for the benefits that they derive from some action. Conversely, they call it a “negative externality” or a “negative neighborhood effect” when it is infeasible to charge someone not to do something.

There are neighborhood effects in public as well as private life. Any public decision undertaken with less than unanimous consent threatens to impose some external costs on the dissenting minority.

Much of economic research and debate is consumed with how to deal with externalities. And the name of this blog reflects that. It began in 2009 as a running commentary about state and local economic policy. Over the years, we’ve expanded our view of the neighborhood, touching on topics that affect global as well as local neighborhoods.

The blog is hosted by the Mercatus Center at George Mason University but the opinions we express are ours and do not necessarily reflect those of the Mercatus Center or George Mason University.

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