Providing a public good that causes a local harm to its host poses two problems previously unexplored together: where to locate it and how large it should be. We propose a mechanism combining some market-like properties with a modified second-price auction. The mechanism selects a host, a facility size, a compensation for hosting the project, and determines how the compensation is split among the non-hosts. If each community bids truthfully for becoming the host-a strategy from which no community has incentives to deviate-the selected allocation is globally optimal, even if communities’ preferences are private information. In contrast with the literature, the host pays the second-highest bid while receiving the market benefits to prevent distortions in the optimal size.
