Question

Relate these questions and your responses to types of “market failure.”

Why do many new development communities place restrictive covenants on residences that prohibit all but a few paint-color schemes on homes?

Answer 1

Restrictive covenants give development a more standard appearance and control over some of the activities that take place within its boundaries. The main purpose of enforcing covenants is protection of property values. Thus, the main purpose of prohibiting all but a few paint color schemes on homes is protection of the property rights of the consumers. Thus, the problem of assignment of property rights can be prevented and this helps in preventing market failure.