Politics and Social Costs: Estimating the Impact of Collective Action on Hazardous Waste Facilities

Firms that generate negative externalities may consider the effects of their location on the surrounding environment because of the right of their prospective neighbors to demand compensation for pollution and raise the transaction costs of location. Since communities vary both in the value individuals place on the environment and in the ability of residents to organize politically, locations that generate the least political opposition may not be the locations that result in the lowest externalities. This article tests whether the degree to which firms internalize their externalities depends on the ability of affected communities to engage in collective action. The results indicate that firms processing hazardous waste, when deciding where to expand capacity, do take into account variations in the potential for collective action to raise their costs.