Legal Definitions - neighborhood effect

A neighborhood effect is a type of externality, which refers to the social or monetary consequences of one's economic activity that affect others without compensation. It can be positive or negative.

• Positive externality: When a homeowner in a neighborhood invests in attractive landscaping, it can increase the property values of neighboring homes. This is a positive externality because the homeowner who invested in the landscaping does not receive direct compensation for the increase in property values of their neighbors.
• Negative externality: A nearby factory that pollutes the water can harm the health of people living in the surrounding area. This is a negative externality because the factory does not compensate those affected by the pollution.

These examples illustrate how economic activity can have consequences that extend beyond the individual or business involved. The neighborhood effect is important to consider when making decisions that impact the community as a whole.