Final answer:
Building a new home with upgrades may result in a positive externality by increasing neighboring property values due to enhanced neighborhood attractiveness. This concept is akin to the theory of rational expectations, which posits that home prices adjust immediately based on expectations for future changes.
Step-by-step explanation:
If you build a new home with more upgrades and amenities than your neighbors, your home will probably be affected by a concept known as externalities. Externalities are consequences of an economic activity experienced by unrelated third parties. Building a higher-value home in an established neighborhood can affect the property values around it, sometimes causing them to increase due to the perceived improvement in the neighborhood's quality and amenities.
For example, investments in private education can raise a country's standard of living, which, like your home upgrades, can positively influence surrounding areas. Similarly, negative externalities occur, as when trash is dumped upstream and impacts homes downstream, it can decrease property values. Your situation is similar to the theory of rational expectations, where the future value of homes is predicted based on current actions and improvements, leading to immediate changes in home prices.