Our expert says:
There is no danger of infection unless someone actually touches the faeces. The health risk from dog faeces are the bacteria and parasites they often contain. People usually get infected if they swallow soil contaminated with dog faeces e.g. when children play in soil and then put their hands in their mouths, or when vegetables grown in soil are not properly washed before being eaten.
But health risks aside, this practice is not acceptable: it sounds like it has a definite negative impact on neighbours such as yourself and anyone using the footpath. People have the legal right to a healthy, clean environment free from the odour of dog faeces. Why can't your neighbour close the bag and hang it on his/her side of the fence?
The other aspect that bothers me from a health (and aesthetic) viewpoint: should it rain, an open bag could fill up and the contents soil the footpath and get into the stormwater system.
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