A Budget-Balanced Mechanism for Siting Noxious Facilities with Identity-Dependent Externalities

Yunkyeong Seo, Younghwan In

Abstract:

We apply Minehart and Neeman's (2002) auction-like procedure for siting nox-
ious facilities to the environments where there are identity-dependent externalities,
i.e. the negative externality depends on who becomes the host. We show that it
is an -equilibrium for any small  for each community to bid its true disutility
minus the minimum externality if there are a sucient number of communities in
a general asymmetric environment. We also show that the bidding in a symmet-
ric Bayesian Nash equilibrium converges to the true disutility minus the average
externality as the number of communities gets larger in a symmetric environment.
Both equilibria tend to hurt eciency by choosing a socially undesirable host. We
also prove that the mechanism still guarantees the ex-post individual rationality of
every community as in the case without the externalities.