A Sealed-Bid Auction Mechanism for Siting Noxious Facilities

Abstract

This paper proposes a sealed-bid mechanism for facilitating the siting process of noxious facilities such as prisons, trash disposal plants, and incinerators for hazardous waste. These facilities have created such opposition by communities that the acronyms NIMBY (not-in my backyard) or LULU (local undesirable land use) are now in common usage to describe the public's reaction to them. The noxious facility siting problem arises because there are economies of scale associated with having only one plant to serve the needs of a wide region. The community that hosts the plant absorbs all of the environmental costs, while the rest of the region enjoys the benefits of the facility. One reason that these facilities have been so strongly opposed by communities is that they generate relatively little new employment and provide limited additional taxes in relation to their perceived negative impact (D. Morell and C. Magorian, 1982). Some compensation arrangement is thus needed to share the gains from the winners to the potential loser. This paper discusses a sealed-bid auction mechanism for selecting a location for the facility so that all communities feel they are better off than under the status quo.

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