Market vs. Government: The Political Economy of NIMBY

Many important social choice problems involve selecting a single community (the “host”) to bear the cost of a project which yields positive net benefit for society as a whole (referred to as NIMBYs, for "Not In My Back Yard"). For example, society needs to dispose of its waste, but no one wants a waste facility in their backyard. This paper asks: Should NIMBYs be sited by market or government? To this end, we compare market allocations with allocations derived from governments (i.e., legislative choice with and without voluntary agreements). With either market or government allocation, a key factor in assessing outcome efficiency is whether or not potential hosts possess the ability to make "final" offers. If the allocating institution (rather than potential hosts) has this ability, then inefficient outcomes are likely. We consider the constitutional problem of choosing among these three NIMBY-allocators under a "veil of ignorance", and show that the allocation institution selected need not lead to efficient outcomes, although the institution selected will involve voluntary agreement. * Professor, Department of Public Policy and Management, Wharton School, University of Pennsylvania, Philadelphia, PA 19104, and Visiting Associate Professor, Olin School of Business, Washington University, Campus Box 1133, One Brookings Dr., St. Louis, Missouri 63130. The authors would like to thank Howard Kunreuther and especially Stephen Coate for valuable comments. Please address correspondence to the first author.