From the abstract:
Does local government regulation of new infrastructure with local externalities result in efficiency? Although local governments’ choices can internalize local costs, political or contracting frictions may cause actual outcomes to deviate from the idealized benchmark of Coase (1960). I study this problem in the context of wind farms. I develop a model of interaction between households, local governments, and wind developers where wind farms are built only if they are both profitable and allowed by local governments, who weigh local costs against payments from developers. I estimate that the average household’s cost of living three miles from a wind farm is around 7.5% of its home’s value. Each built wind farms trade off more than $7 of engineering profit for each $1 of cost to households. This arises in part because local governments must be paid roughly $3 for every $1 of externality to approve projects. Moreover, state regulations limiting payments to local governments further depress windfarm construction. I compare the performance of alternative developer-government contracting rules in reaching the United States’ net-zero carbon goals. I find that requiring wind developers to pay local governments 20% of nearby homes’ value raises social welfare by about $220 billion relative to when developers cannot pay local governments.
