A Transaction Cost Economizing Approach to Regulation: Understanding the Nimby Problem and Improving Regulatory Responses

Abstract

This paper develops a transaction cost economic model for regulation and applies the model to environmental siting regulations designed to overcome NIMBY (Not In My Back Yard) political opposition. Negotiations between developers and resistant local communities to site waste facilities, such as landfills or solid waste incinerators, can be characterized as a contracting problem. A rudimentary application of the Coase theorem suggests that developers should be able to compensate communities adequately for hosting a waste facility, but rarely do such negotiations find success. Transaction costs associated with the requisite negotiations, communication, and implementation of the projects preclude efficient bargaining, and thus NIMBY opposition halts the siting of socially necessary and beneficial facilities. Viewing NIMBY disputes as a contracting problem within the world of positive transaction costs therefore reveals the dynamics that foil negotiations between developers and communities. Such a perspective also identifies the role that the theory of the firm can play in understanding how siting regulations overcome those transaction costs and how regulatory regimes can be optimally designed for siting alternative facilities. This paper employs the theory of the firm, specifically transaction cost economics, to articulate the functional purpose of environmental siting regulations and to chart an agenda for regulatory reform. While transaction cost economics traditionally compares mechanisms such as spot markets, contracts, and direct ownership to facilitate economic transactions, we extend transaction cost theory to political transactions between policymakers and initially resistant, though potentially supportive, constituencies. We believe this approach offers a fruitful perspective on regulatory policy. We use it to develop a taxonomy of alternative regulatory regimes and then to propose an overview of regulatory reform for siting socially desirable waste facilities that are either blocked by NIMBY opposition or are unnecessarily shielded from effective negotiations and community participation.

Keywords: Environmental Regulation, Transaction Cost Economics, Land Use, NIMBY

JEL Classification: H41, K23, L51, O21, Q28