Siting noxious facilities with victim compensation: N-person games under transferable utility

The siting of noxious facilities embodies the classic efficiency-equity dilemma, where efficiency tends toward centralized facilities, while equity favors completely dispersed siting schemes. Traditional prescriptions for confronting this dilemma generally focus on the issue of victim compensation. The foremost task concerns determining the proper amount of compensation to be received by host communities. In this paper, the case of transferable utility is taken up, where mechanisms for carrying out sidepayments (i.e., compensation) exist. This analysis proposes that the siting problem is best handled as an allocation game for which methods from n-person cooperative game theory are well suited. This new approach addresses a long-standing need for a rigorous framework within which solutions based on principles of equity can be formulated. The kinds of outcomes generated by this new analytic stands in contrast to, and underscores the serious inadequacies of, traditional, often ad hoc prescriptions for solving the siting game. For one thing, the analysis suggests that the traditional formula, that of transferring utility so as to bring all players to the point of Pareto efficiency, undercompensates victims. In short, without a framework such as proposed herein, stakeholders may find themselves debating proposed solutions that ultimately violate basic notions of equity and, so, fail to engender cooperative modes of behavior needed for sustainable solutions. In fact, traditional notions of compensation, by violating the so-called core constraints, may give players inherent incentive to defect from cooperative agreements. Given this condition, it should come as no surprise that the outcome of many negotiations is terminal impasse.