Paracrine signals maintain developmental states and create cell-fate patterns in vivo, and influence differentiation outcomes in human embryonic stem cells (hESCs) in vitro. Systematic investigation of morphogen signaling is hampered by the difficulty of disentangling endogenous signaling from experimentally applied ligands. Here, we grow hESCs in micropatterned colonies of 1-8 cells (“μColonies”) to quantitatively investigate paracrine signaling and the response to external stimuli. We examine BMP4-mediated differentiation in μColonies and standard culture conditions and find that in μColonies, above a threshold concentration, BMP4 gives rise to only a single cell fate, contrary to its role as a morphogen in other developmental systems. Under standard culture conditions, BMP4 acts as morphogen, but this effect requires secondary signals and particular cell densities. We further find that a “community effect” enforces a common fate within μColonies both in the state of pluripotency and when cells are differentiated, and that this effect allows more precise response to external signals. Using live cell imaging to correlate signaling histories with cell fates, we demonstrate that interactions between neighbors result in sustained, homogenous signaling necessary for differentiation.