Are Risk-Benefit Tradeoffs Possible in Siting Hazardous Facilities?

Abstract

Ever since Alfred Marshall introduced the notion of consumer's surplus into the literature as a measure of well-being, economists have been interested in determining the amount of compensation required to leave individuals indifferent between the status quo and a new situation where less of a commodity can be consumed (for example, due to an increase in prices). The Hicksian and Kaldor-Hicks criteria of specifying compensation variations may be appropriate for normal market goods where there is a wellspecified demand curve. The analysis is less applicable for dealing with environmental resources where elements of risk are involved, or there exist public good features that make it difficult to estimate people's values for different amenities (V. Kerry Smith, 1989). This paper investigates the question of the appropriate role that providing benefits to a host community (possibly in the form of compensation) can play in improving the chances of siting a facility that is perceived to be potentially hazardous. In Section I, we develop a simple twoperiod expected utility model to explain preferences for benefit packages. The empirical analysis examining the predictive power of this model will be related to the following problem of current interest: The U.S. Congress is attempting to locate a site for storing high-level radioactive waste from commercial nuclear power plants in the United States. An underground repository is to be constructed 2000 feet below the earth's surface for the purpose of permanently storing nuclear waste shipped in casks from power plants around the country. Once filled to capacity, the repository would be sealed to minimize any radiation leakage. Based on the results of a telephone survey of residents of Nevada regarding their attitudes toward a high-level nuclear waste repository, we suggest ways that the expected utility model might be modified to take into account behavioral factors that are not normally considered part of individual models of choice under uncertainty. These factors may be useful in determining when compensation will be a useful tool in facilitating the siting process.

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