Housing Market Externalities in the Housing Industry

Housing Market

Externalities in the Housing Industry (Additional Pages Request)

The housing industry is quite profitable a venture, though it is one that has caused many problems in today's economy, for two main reasons. First, the housing market has been quite volatile, simply because it has been under-regulated in certain areas and has therefore been the subject of a game of chess led by big corporations. Second, the housing industry is often a local matter, and is thus something that cannot be easily moved, transported, or transplanted, and for this reason it is in many ways unique. In order to better understand the way in which this industry works, this paper will discuss externalities, goods and services within this arena, as well as the many other concepts that relate to these terms.

Just as many other sectors of an economy, the housing industry is subject to positive and negative externalities. Externalities, by definition, signify costs or benefits that are not transmitted through prices, but that are nonetheless incurred by a 'third party' or a party that did not agree to or was not part of an action or a transaction that caused the said cost or benefit. Within these confines, thus, positive externalities become (external) benefits, and negative externalities become (external) costs. These economic terms are useful because they help people understand and justify cases in which individuals may either be harmed by or benefit from the actions of others (Basic Economics, 2012). These are particularly important in the housing market, where positive externalities signify a good neighbor moving in and improving his house, thereby improving the neighborhood, or a recession settling in and making a neighborhood unprofitable to those who want to sell their house. Though in the latter example specifically the individuals who want to sell their house had nothing to do with what caused the recession, they are nonetheless affected by it; therefore, this can be called a negative externality.

It is also important to recognize, when aiming to understand how the housing industry functions, whether the goods or services provided by this industry are public or private, and whether these provided services exhibit rivalry or non-rivalry. The answer to the first part of this question is that the housing industry can provide both public and private gods. Public goods, for instance, can be signified by public housing, such as the low-income housing programs found in many inner cities across the United States. When something is a public good, by definition, it is subject to non-rivalry, for it can be enjoyed by all. Yet the housing industry is also a privatized business, and by definition, it not only creates rivalry, but also profit and loss. In this latter instance, the housing industry as providing private goods or services and be exemplified through its network of realtors, banks, loans, etc. all signifying monetary transactions, and all of which are, often times, individual, or private.

Furthermore, to build upon concepts discussed above, is also important to recognize whether the goods and services provided by the housing industry are excludable or non-excludable. A non-excludable good is the same thing as a public good, i.e. everyone can have a share. Yet an excludable good is not the same thing as a private good, and rather means that it can be provided to some, but others may not partake in it necessarily. The housing industry often, again, due to its size, local-focused enterprises, and uniqueness, can be subject to either concept, depending upon the market and the specific housing in question.