Externalities and the train horn
By: J. David Chapman/February 4, 2021
What determines the price and attractiveness of commercial and residential real estate? Researchers at the University of Central Oklahoma Real Estate Program are working in this area. We are surveying Oklahoma City residents to determine the effect of certain conditions, events and developments on their willingness to purchase local real estate. In our business, we refer to these conditions, events and developments as externalities.
Externalities occur when the production or consumption of a specific good or service affects a third party that is not directly related to that production or consumption. Externalities can be positive or negative, such as pollution, traffic, real estate developments, and public areas and parks.
I witness the effects of externalities often in my real estate practice. Last weekend, while showing homes to a potential buyer, we pulled into a driveway and the couple noticed an operating oil well across the street. There was no need to even enter the home. Likewise, electric substations, power lines, and property adjacent to busy streets tend to turn away potential buyers. Locations near schools and parks can be regarded as positive or negative. Generally, walkable and bike-friendly neighborhoods are considered more popular.
Effects of externalities can be observed at city council meetings. This is where we see the NIMBY (not-in-my-backyard) syndrome. Anytime a new development is proposed, there are outcries from homeowners, homeowner associations, and hired attorneys trying to make the case that the new proposed development nearby or the opening of certain businesses can create negative externalities causing decreases in property values, increases in traffic, and general dissatisfaction in the community. Additionally, at the same meetings, proponents of the development or business make a case for it being an amenity and being a positive externality. Such decisions put local elected officials in the no-win situation of choosing one side against the other.
Edmond just went operational on what is known as a “quiet zone.” Quiet zones implement technology and physical barriers that eliminate the requirement and need for the train engineer to sound the horn or whistle. This is a great example of the elimination of a negative externality creating economic development. I can assure you, our researchers are anxious to see the effects muzzling those horns will have on property values near the railroad. I would love to know your opinions and examples of positive and negative externalities.
J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).