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Tuesday, October 18, 2005

Eminent Domain and Efficiency

Eminent domain has, until recently, referred to the power of federal, state, or local government to pay just compensation and take ownership of private property to be used for some public purpose. Once the Supreme Court delivered the Kelo ruling this all changed. Now eminent domain may be invoked to promote economic development. What this means is that if you own some coveted piece of property that someone else wants to build a shopping mall on, watch out, you just might loose your property.

This new outlook on eminent domain has sparked a national debate and raises several questions arising from the frameworks of the Constitution, liberty, and economic efficiency; and has prompted me to consider the legitimacy of eminent domain in the first place. I will only address eminent domain from the framework of economic efficiency here, although I would be interested to hear your thoughts on the others either pre- or post- Kelo.

Economic efficiency holds that it may be appropriate for government to act when the market fails to provide a public good, or a monopoly or an externality is present. The issue here is whether or not the exercise of eminent domain is the appropriate tool to use to correct for market failures.

Eminent domain is not effective at correcting the inefficiencies resulting from the presence of a monopoly. Someone may try to make the argument that by taking private property and turning it over to developers independent of the monopolistic force a monopoly controlling a community could be dissolved be creating competition. I tend to think such action would only serve to create a different kind of monopoly, one on development. This sounds like central planning, which we know is not efficient.

Similarly, I don’t see how the burden of an externality could be alleviated by using eminent domain. Someone might try to argue that if pollution from the smoke stacks of a firm are imposing a negative externality on nearby property owners, then government could take the firm’s property and shut it down to get rid of the externality. Such logic is flawed because economic efficiency offers a solution that keeps the firm producing and compensates the victim of the externality so resources do not go unused or to other less productive means.

Eminent domain may however be acceptable as a means necessary to provide some public good. National defense is the only public good I see provided in our system of political economy as it is both non-rival and non-excludable. This of course does not mean it’s the only good provided by government, it’s just that most of the goods and services provided by government are either private or club goods. In the course of providing national defense it may be necessary to invoke the power of eminent domain. For example, it might be determined that the construction of a new military facility in a densely populated area is necessary. Land is scare in such areas and eminent domain may have to be used in order to get the facility built, especially in the case of hold-outs. Or maybe the area’s not that densely populated. Maybe government needs vast open spaces without anyone around. In this case government might take farms or ranches. It’s certainly hard to conceive of a time when government doesn’t have enough of its own land, but that doesn’t preclude government from getting more in the name of national defense from the framework of economic efficiency.

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