A new community park opens a few blocks from a residential subdivision, and nearby home values rise. Which principle explains this?
Correct Answer
C) Externalities
The principle of externalities states that uses outside a property, over which its owner has little or no control, can have positive or negative effects on its value. A new park is a positive externality.
Why This Is the Correct Answer
Option C is correct because the principle of externalities states that uses outside a property, over which its owner has little or no control, can have positive or negative effects on its value. A new community park a few blocks away is a positive externality.
Why the Other Options Are Wrong
Option A: Contribution
Option A, Contribution, is wrong because contribution measures how much a component of the property adds to its value. The park is not part of the homes being valued.
Option B: Consistent use
Option B, Consistent use, is wrong because that principle requires land and improvements to be valued on the same use. It does not explain an outside amenity raising values.
Option D: Increasing returns
Option D, Increasing returns, is wrong because it describes added inputs producing proportionally greater value up to a point. The park's effect comes from outside the property, not from added investment by the owners.
External means outside the lot
If the value change comes from something beyond the property line that the owner cannot control, think externalities.
How to use: Use this when an outside influence such as a park or nuisance changes nearby values.
Exam Tip
Contribution concerns parts of the subject property; externalities concern influences from outside it.
Common Mistakes to Avoid
- -Confusing externalities with contribution
- -Assuming externalities are only negative
- -Applying an externality adjustment without market support
Concept Deep Dive
Analysis
This question tests recognition of the principle of externalities. A new park outside the subdivision, over which owners have little or no control, raises nearby values. That is a positive externality; the other principles concern improvements on the property itself or input-output relationships.
Background Knowledge
Externalities can be positive, such as parks or good schools, or negative, such as a sewage plant or heavy traffic. Because owners cannot control them, these influences show up as locational effects on value. Appraisers support externality effects with market evidence.
Real-World Application
After a city opens a large park with trails, homes within a few blocks begin selling for more than similar homes farther away. The appraiser analyzes paired sales to measure the location effect. The report attributes the difference to a positive externality.
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