Saturday, August 04, 2007

Do people dislike being around the rich?

Daniel Gross reviews Robert Frank's latest books. This sentence caught my eye:

When asked whether they’d rather have a 4,000-square-foot house in a neighborhood of 6,000-square-foot McMansions, or a 3,000-square-foot home in a zone of 2,000-square-foot bungalows, most people opt to lord it over their neighbors.

Do people really behave as reflected in this survey? I bet the 4,000 square foot house surrounded by McMansions would sell for more the 3,000 square foot house surrounded by bungalows.

Market prices should reflect the externalities imposed by neighbors. I don't spend a lot of time talking with real estate agents (I have been living in the same house for about twenty years), but if my recollection is correct, their conventional wisdom is that houses surrounded by bigger, more expensive homes sell for more, other things equal, than houses surrounded by smaller dwellings. This suggests that the rich convey positive, not negative, externalities.