Tuesday, March 14, 2006

Buying Your Neighbors

One of the ways parents' affected children in our discussion last week was by keeping them away from the "wrong" people and pushing them toward the "right" people. They primarily achieve this by controlling the people you are exposed to by selecting neighborhoods and schools (it used to be that these choices occurred simultaneously, but it seems that I am like the only person who actually attended the neighborhood school -- so, I guess, we have to think of these separately).

Beyond the environment for children, people have preferences for who lives nearby. Our neighbors affect us in ways both good and bad (e.g., they can be nice, helpful, sources of favors or status or they can steal, litter, or annoy).

Yet, while I care about who are the people in my neighborhood (in my neighborhood, in my neigh-bor-hoood*), I have very little direct control over who my neighbors actually are. When purchasing a house, I don't also negotiate a contract with Megan and Garrett down the street. I buy my house essentially hoping that they will stay (or at least only be replaced by someone of equal or greater quality). Thus, neighbors can impose large positive or negative externalities on the other members of the neighborhood.

As you all learned in ec10, markets with externalities tend to be very inefficient. Individuals, developers, and communities try and correct some of the problems with externalities by creating zoning rules for their communities or protective covenants for their developments which impose rules on homeowners.

Still, housing markets have this fascinating property that a potentially large fraction of a house's values is unrelated to the specific qualities of the house, but rather reflects the quality of the people living in adjacent houses.

*For those confused by this reference you didn't watch enough Sesame Street growing up. Click here and select song 3 (and, yes, I totally bought this album just now).

I have my doubts as to whether you can make it to Harvard without having watched sufficient amounts of Sesame Street as a child.
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