Which economic principle explains why a property's value may decrease when a busy highway is built nearby?
Correct Answer
B) Principle of externalities
The principle of externalities explains how external factors beyond the property boundaries (like noise, traffic, or environmental issues) can negatively or positively impact property values. A busy highway creates negative externalities through noise and traffic.
Why This Is the Correct Answer
The principle of externalities explains how external factors outside a property's boundaries can significantly impact its value. A busy highway creates negative externalities including noise pollution, air pollution, increased traffic congestion, and reduced privacy and tranquility. These factors are beyond the property owner's control but directly affect the property's desirability and market value, causing depreciation despite no changes to the property itself.
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