The decrease of lung compliance in pulmonary edema underlies ventilator-induced lung injury. However, the cause of the decrease in compliance is unknown. We tested the hypothesis that in pulmonary edema, the mechanical effects of liquid-filled alveoli increase tissue stress in adjacent air-filled alveoli. By micropuncture of isolated, perfused rat lungs, we established a single-alveolus model of pulmonary edema that we imaged using confocal microscopy. In this model, we viewed a liquid-filled alveolus together with its air-filled neighbor at different transpulmonary pressures, both before and after liquid-filling. Instilling liquid in an alveolus caused alveolar shrinkage. As a result, the interalveolar septum was stretched, causing the neighboring air-filled alveolus to bulge. Thus, the air-filled alveolus was overexpanded by virtue of its adjacency to a liquid-filled alveolus. Confocal microscopy at different depths of the liquid-filled alveolus revealed a meniscus. Lung inflation to near-total lung capacity (TLC) demonstrated decreased compliance of the air-filled but not liquid-filled alveolus. However, at near TLC, the air-filled alveolus was larger than it was in the pre-edematous control tissue. In pulmonary edema, liquid-filled alveoli induce mechanical stress on air-filled alveoli, reducing the compliance of air-filled alveoli, and hence overall lung compliance. Because of increased mechanical stress, air-filled alveoli may be susceptible to overdistension injury during mechanical ventilation of the edematous lung.