Dealing With Construction in Your Neighbourhood

Dealing with construction activity near your place is a real pain. There’s a house that is being constructed right opposite my place and it is alarming how much it has disrupted my life. My productivity and peace of mind has been severely affected. This is a perfect example of negative externality, where a third-person (me) is affected by a transaction of which he is not a part.

The construction noise, from digging the borewell to cement mixers, have made it impossible for me to work from home. I find it hard to think about regulating platform economies or give a webinar while a guy outside my place is hammering on iron. That adds a couple of hours of travel to work and back.  Then, there’s the problem of fine dust that is deposited in all corners of my house. I have to either pay extra to the domestic help or spend a couple of hours to clean it myself. Not to mention, the added health risk of inhaling the particulate matter. All of these presents a real cost to the neighbours of a house that’s newly constructed.

The externality presents a market failure. The price of a house (whether it is rent or the cost of production) does not include the damage/suffering caused to others who will not benefit from that house construction. How do you solve for this  externality?

Most people would silently go through the suffering with minor complaints made to the owner and a lot of internal whining. Very few would have the power to stop the construction or put significant hurdles in the way, so as to increase the project timelines. Neither of it is an efficient solution. The owner has a right to construct a house on a plot of land that he has purchased and the neighbours have a right to peace and quiet and a right to expect their house not to get inundated by cement dust.

The only solution seems to be a Coasian solution. The owner can pay an amount to compensate for the damage caused to the neighbours and carry on with the construction activities. The externality will be internalised this way. The receivers of the payment can use the money to hire cleaners, install an air purifier, or invest in sound proofing. The additional payment gets added to the cost of construction, which can be passed on to the eventual occupiers of the space. The rent can be slightly higher to reflect this charge or if the owners decide to stay there themselves, they will bear the cost over many years that they live there.

Now, I’m off to find the owner and give him a lesson on Coasian solutions to externality and try extract compensation payments.

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