Dan Popp
Revisiting the neighborhood effect
By Dan Popp
May 8, 2012

If my neighbor were to start a hog farm next to my bedroom window, he would be lowering my quality of life. Economist Milton Friedman called such involuntary transfers of benefits and costs, "neighborhood effects." And many of us have accepted a role for government in mitigating these effects. I'm thankful that the city council has written zoning laws to keep hog farms out of residential areas.

A neighborhood effect can be good. Let's say that, rather than a porcine Ponderosa, my neighbor builds a beautiful garden on his front lawn. That might raise my property value without me having to lift a finger. I benefit from someone else's work. Another neighborhood effect.

The politician's cry that we must invest in the education of strangers is the neighborhood-effect argument: Smarter, better-equipped citizens will raise the quality of life for all of us — and, since all will receive the benefit, it's only right that everyone pay the cost. [1]

The call to mitigate neighborhood effects is an appeal to justice. So how much justice can we create in our neighborhood?

Well, let's imagine two neighbors, Gary and Gloria. Gary is going off to college to get a Bachelor's degree. He demands that Gloria pay part of his tuition, since she'll benefit in some ways when he returns with his sheepskin. We can see immediately that there are many problems with Gary's position.

First of all, we have the Obamacare mandate problem — that of forcing a free citizen to purchase something. If the government may not compel you to buy something for yourself, then surely it may not force you to buy something for someone else. Goodbye, welfare state.

The second problem is that Gloria faces a certain cost, but an uncertain reward. Gary may not in fact earn a diploma. If he does, he may not get a job that's any better than the one he would have had anyway. He may not create any positive effects for Gloria at all. This is a gamble that Gloria might not be willing to take if she had a choice.

Next, if justice tells us that Gloria must invest in Gary's education, then justice also demands that she have some say in his instruction. An investor is, after all, an owner. She and Gary may disagree about where he should go to school, what he should study, and how hard he should study. If we force Gloria to invest, we must also force Gary to act in ways likely to maximize Gloria's return.

It could be that the biggest challenge in our pursuit of justice is the simple question: How much will Gloria owe Gary? I think the answer is, "We can never know." Perhaps we're letting her off too lightly; maybe the benefits to her will outweigh her bill. One person or the other gets the short end of the stick, and our ignorance is unacceptable — if justice is truly our object.

But is this really justice?

Look at what we've done on the most fundamental level. We've established the principle that Gary can place a burden on Gloria without her consent. One person has the power to obligate another. Now Gary dreams of postgraduate studies and a PhD. or two. He also wants a new addition on his home and a swimming pool in his back yard that could raise property values. He sends bill after bill to Gloria. In our quest to justly compensate Gary for the good neighborhood effects he may or may not be creating, we've produced injustice. We've made Gloria his slave.

Negative neighborhood effects certainly should be remedied, probably by government. The state should ensure that the costs of polluting the stream are borne by the polluter. But positive neighborhood effects are a bit more complicated. Gary, in our story, gets more benefit from his actions than any other single person. Perhaps the least unjust solution is for him to bear the costs of those benefits himself, and/or to find willing investors in his education. That eliminates government coercion — which is the biggest neighborhood effect of all.


[1]  Elizabeth Warren was trying to invoke the neighborhood effect when she said that taxpayers paid for the roads whereon the businessman gets his product to market (therefore somehow the producer owes even more taxes than he's already paying). But when they choose to engage in trade, both the capitalist and his customers benefit from cheap and convenient transportation of goods. A neighborhood effect must include an involuntary exchange, and uncompensated costs or benefits. The only party in this scenario forcing anyone to do anything is the government, levying taxes for roads. And it should be obvious that the folks standing in the way of more privately owned roads are not capitalists, but statists like Ms. Warren.

© Dan Popp


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