Allocation, Externalities, and Building Value

Peter F Colwell and Joseph W Trefzger

The Journal of Real Estate Finance and Economics, 1994, vol. 8, issue 1, 53-69

Abstract: Externalities generally are viewed as impacting land values rather than building values. Yet when locational obsolescence is attributed to externalities, the implication is that externalities impact primarily on building values. The presence of negative externalities generally does not determine whether a building suffers from locational obsolescence; the more general cause is a misallocation of land. At the market allocation there is no locational obsolescence even in the presence of an externality, while at the optimal allocation only an externality can produce locational obsolescence. Because locational obsolescence can exist without externalities, an externality is not a necessary condition for locational obsolescence. Because an externality can be present without accompanying locational obsolescence, an externality also is not a sufficient condition for the existence of locational obsolescence. Copyright 1994 by Kluwer Academic Publishers

Date: 1994
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