(A) budget-balanced mechanism for siting noxious facilities with identity-dependent externalities

Abstract

Among the budget balanced mechanisms for siting the noxious facilities, Neeman and Minehart's auction-like procedure has been proven to reach the truth-revealing equilibrium satisfying the Pareto efficiency when sufficiently many communities participate and to have a bounded efficiency loss even with a few communities. However this study remodels their mechanism by allowing the players to take the identity dependent externalities into account. Then it shows that bidding `the minimum externality subtracted from the disutility to be a host' is an ε-equilibrium for any small ε in general asymmetric environment. It also shows the bidding converges to `the average externality subtracted from the disutility' as the number of players approaches infinity in a symmetric Bayesian Nash equilibrium in the symmetric environment. Both equilibria have a tendency to distort the Pareto efficiency by choosing a socially undesirable host. It also proves that the mechanism still guarantees the ex-post individual rationality of every player like in the case without the externalities. Consequentially, this study points out the possible failure of Neeman and Minehart's mechanism in allocating the noxious facility when the policy maker put the acheivement of the Pareto efficiency over that of the budget balance.