http://www.cato.org/pubs/regulation/reg14n4-inhaber.html

I found this article on the Cato Institute’s website as part of their Regulation magazine. Quoting directly from the About section of their site, “The Cato Institute was founded in 1977 by Edward H. Crane. It is a non-profit public policy research foundation headquartered in Washington, D.C. The Cato Institute seeks to broaden the parameters of public policy debate to allow consideration of the traditional American principles of limited government, individual liberty, free markets and peace. Toward that goal, the Institute strives to achieve greater involvement of the intelligent, concerned lay public in questions of policy and the proper role of government.”

The article discusses how the concept of a typical Dutch auction can be applied in the reverse fashion to solve situations involving undesirable outcomes for the participants. Two of these situations that were described in the article were the designation of the location of LULUs (locally unwanted land uses) such as hazardous wastes, halfway houses for prisoners, radioactive detritus, and trash; and how airlines determine who to kick off a flight when it is overbooked. In both cases parties exist that absolutely do not want to change their current preference, riding the plane at the current time or living without said LULU in their backyard, but there are also others who would be willing to be compensated to accept the undesirable outcome.

There is a good chance the reader is familiar with the process that airlines use when a flight is overbooked. Traditionally, a free ticket to any destination is offered to the first people to relinquish the amount of seats that are needed. If in that case no one decides to accept the offer, bonuses continue to be added until someone does. This could include an extra $50 and increasing until the right number of people has accepted. This is in essence a reverse Dutch auction. Instead of there being one price that is lowered until someone accepts, the compensation gets increased until someone accepts.

A similar process is used for the designation of LULUs. Once an environmentally adequate location has been determined by thorough study, the communities involved are subjected to the reverse Dutch auction procedure of being offered compensation for allowing the LULU into their community. This process has been implemented after riots and excessive protesting occurred consistently when sites were chosen using statistical criterion. The main protest was “not in my backyard” or NIMBY trying to get the site to be moved elsewhere. The reverse Dutch auction operates on the premise that everyone has their price and that by offering things like tax exemptions, parks and playgrounds, city funding, etc; the majority of residents will accept and pass the resolution.

The reverse Dutch auction encourages people to place their own values on the undesirable outcome. It also allows for only the interested parties to participate in the auction. If you wanted to remain on the particular flight you simply need to hold your ticket and do nothing. Likewise, if you do not want the LULU in your backyard, simply do not change your mind despite the compensation. It is also the most efficient process to accomplish the task and reach the desired goal. The interested parties must act as soon as the company meets their price to avoid being beaten by the competition that is also looking to get compensated. This article took a concept of an auction we learned about in class and applied it in a modified way to discuss real world processes.