Lindahl vs. Lindahl: Optimal siting and sizing of a noxious facility

The provision of projects generating net benefits for several communities except for the host community poses two problems: where to locate the unpleasant facility, and how large this facility should be. We propose a mechanism that combines some market-like properties with a modified second-price auction. We elicit prices per unit as a host and as a contributor to the facility, the desired quantity (i.e., facility size), and an auction's bid defining the hosting community. Regardless of whom is selected as the host, any equilibrium outcome of this mechanism is a Lindahl allocation. If, in addition, every community truthfully reveals its gain from becoming the host (with respect to being a contributor), the selected Lindahl allocation is globally optimal.

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