Hazardous Facility Siting When Cost Information is Private: An Application of Multidimensional Mechanism Design

Abstract

The siting of hazardous facilities often involves externalities that extend beyond the border of the community selected as a site. Thus, the private information of each community is potentially a vector of costs comprising a cost for each of the possible sites. I characterize the conditions for the existence of a direct mechanism that is incentive compatible, individually rational, and budget balancing. Incentive compatibility implies a pattern of compensation payments that often conflicts with commonly held views on how communities should be compensated for environmental costs. Regardless of the properties of the transfer payments, when nonparticipating communities cannot block the siting of the facility, it will often be possible to implement siting policies with a balanced budget by inducing truthful cost announcements.

JEL Classification: R53