SITING OF NOXIOUS FACILITIES USING AUCTION MECHANISMS : SOME EXPERIMENTS

Abstract

This academic exercise attempts to look at the usage of auction mechanism as a way to site noxious facilities. Such noxious facilities are also known as Not in My Backyard (NIMBY) facilities because nobody wants to be situated near them. However, these facilities bring about immense benefits and thus a solution to site this facility would bring about greater economic efficiency. Many researchers have attempted to solve the siting issue and their works can be classified as theoretical and empirical. The theoretical framework, which uses auction mechanisms as a solution to the siting dilemma, will be examined closely. This form of site selection process is chosen because compensation improves the acceptance of noxious facilities. A series of experiments will then be conducted to verify the theoretical predictions as well as to test two suggested forms of auction mechanisms. The experimental subjects were recruited from the Department of Economics and the rules of the experiments were designed to replicate a real life scenario. Two different environments were created and they differ only in the range of the distribution of social costs. Some of the experimental results were not in line with the theoretical predictions and this is due to the players forming expectations of the other players social costs. Hence in order to reduce their losses, they exhibit a different kind of strategic bidding behaviour. When a narrower range of social costs was used, the results were found to be in consistent with the theoretical predictions. The issue of equity was also considered. Finally, some extensions of this study were suggested and we conclude that auction mechanisms, although inefficient, may still be the preferred choice.