This paper explores the efficiency properties of a voluntary auction under which the city submitting the low bid hosts the region′s noxious facility and receives the high bid as compensation. In the Nash equilibrium of the auction game, the auction mechanism is individually rational (participation is rational for all values of the local environmental costs of the facility), incentive-compatible (the facility is located in the low-cost city), and revenue-neutral. If the compensation of the host city distorts location choices, participation in the auction is rational for all values of local environmental costs if the scale economies associated with the noxious facility are large relative to the average local environmental cost and the distortionary cost per dollar of compensation.
O’Sullivan, A. (1993). Voluntary auctions for noxious facilities: incentives to participate and the efficiency of siting decisions. Journal of Environmental Economics and Management, 25(1), S12-S26.