Question

People in your neighbourhood pay annual dues to a neighbourhood association. This association refunds neighbourhood dues to selected home owners who do a particularly nice job of beautifying their yards. At the most recent home owners’ association meeting, home owners voted to end this practice because they felt that it was unfair that some people would not have to pay their share of the costs of maintaining the neighbourhood. What is likely to happen to the overall level of neighbourhood beautification? Explain.

Answer 1

It is quite likely that the overall level of neighborhood beautification will fall.

While everyone paid annual dues, not everyone was being refunded.

The fact that people voted against the program proves that they view the program as a cost, and not a benefit.

Now, beautifying comes at a cost. Now that the refund program has stopped, most people will also stop spending on beautifying their yards.

There will be a selected few who continue to beautify their yards, but these will be less than optimal. The positive externality created by beautiful yards also requires compensation.

Those who continue to beautify are those have a high marginal benefit attached to it, and are not concerned with the marginal costs.

Most home-owners would now prefer to be free-riders. They view the marginal costs to be higher.

Now that the practice of paying annual dues has been abolished, most people will not exert enough efforts to beautify, and will wait for others to do so. Thus, the overall level will fall.

To restore the level of beauty in the neighborhood, some type of subsidy or refund is required.