Manny puts up a fiberoptic Christmas tree because it is better for the environment, but Jay thinks it is ugly and does not want it in his house. This clip highlights both positive externalities of fiberoptic trees (environmental benefits) and negative externalities of the tree (Jay’s psychic costs). Jay decides instead that he and Manny should go out and cut down a tree for reasons of tradition.
Jay and Manny tried cutting down their own Christmas tree for hours, but it is not budging and keeps ruining their tools. Jay has finally had enough and says Pritchetts know when to give up. All their previous effort represent a sunk cost, and it would take too much effort relative to the reward of a half burned tree to keep going.
The Dunphy’s neighbor has a new boat that they leave in the driveway. Many of the family members are impacted by the visibility of the boat. This represents spillover effects and mean that an externality is present in the market for boats. Some family members see the boat as having a positive externality. Others see the boat as having a negative externality. As there is a relatively low number of people impacted by the boat (the Dunphy’s and other nearby neighbors), Coase theorem suggests that an efficient outcome can be negotiated. But will the Dunphy’s be able to get to it? Claire is immediately interested in finding regulations that restrict how residents can store large property like a boat. Many communities, especially home owner associations (HOAs), have rules pertaining to this situation. These rules are designed to lower the transaction costs associated with these externalities by providing a standardized process for dealing with conflicts between neighbors that settles disputes, thereby increasing the likelihood that an efficient outcome is attained. However, often these processes can end up creating problems themselves. What happens, for example, if the neighbors get together and decide that it’s OK to store the boat in a visible place? If they do and the enforcement agency requires a change, it can make things worse.
Phil is trying to sell the house next door to a couple. In order to make the house as desirable as possible, he wants to put his family’s best foot forward. He wants the buyers to want to live beside his family. So, he has the kids outside gardening. This demonstrates adverse selection, signaling and the importance of spillover effects/positive externalities. Good, helpful neighbors are desirable and can increase a property’s value, especially if they take good care of their yard. Thus, there are positive externalities associated with landscaping. To discuss signaling and adverse selection, consider that someone is less likely to move if the neighbors are good than if they are bad. So, it’s entirely reasonable to consider the housing market as being characterized by adverse selection. Phil is doing all he can to signal that he and his family are good neighbors in order to get the couple to buy the house and to pay a high price for it. But are they good neighbors?
At the end of the scene, you’ll see the other possible new neighbors. It’s clear which family each of the Dunphys would prefer to live nextdoor.
Manny is about to receive an award for perfect attendance at graduation and his step dad shows up to help him celebrate that night. Before leaving, Manny and his father walk through a strong mist of cologne. Gloria notes that despite the terrible smell, she’s never seen him get a mosquito bite. The cologne imposes external benefits (no mosquito bites) also external costs (the awful smell) on the remaining members of the household.