Chapter 6: The Old Lady Visits your Backyard: A Tale of Morals and Markets with Felix Oberholzer-Gee and Reiner Eichenberger
THE NIMBY PROBLEM AND COMPENSATION Political decision-makers in all industrialized, democratic countries are confronted with strong local opposition to major capital investments. Cries of NIMBY (Not In My Backyard) greet the developers of nuclear power plants, waste incinerators, airports, prisons, and clinics for the handicapped. NIMBY projects are deﬁned as all undertakings that increase overall welfare, but impose net costs on the individuals living in the host community. Although citizens readily acknowledge that these collective enterprises are socially desirable, they are not prepared to have them carried out in their immediate neighbourhood. This is not surprising, as the prospective host community has to bear the negative externalities associated with these projects. Supporting NIMBY projects is a public good. Economists have devised handy tools to deal with NIMBY problems. As the aggregate net beneﬁts of undertaking these projects are positive, one must simply redistribute them in an appropriate way. Host communities must be compensated to make their net beneﬁts positive, while everyone else is taxed to raise the sum of compensation. Incentive-compatible auctions prevent prospective host communities from misrepresenting their preferences. Although it may be argued that these auctions are questionable for reasons of fairness, they remain ingenious because the trade is voluntary. All participants are better off, and the outcome is Pareto superior to the project not being executed at all. In reality, however, siting procedures based on price incentives have rarely proved to be successful. The search for hazardous waste landﬁlls and nuclear waste repositories...
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