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The most common defense of government use of “eminent domain” proceedings is that without the power to take land (nominally with just compensation) we would all suffer from the “holdout problem.” The holdout problem is simply this – if we are undertaking a large investment project, such as the building of a new college campus, we would have to purchase lots of tracts of property from landowners. As we purchase more property, the value of each remaining plot would presumably be higher, or at least the bargaining position of each remaining land holder would increase. Thus, there is a strong incentive for the last land owners to “hold out” for exhorbitantly higher prices – prices they could never obtain on the open market – before agreeing to sell their land to developers or governments.

In order to remove this obstructionist threat (which supposedly makes all of us poorer because it raises the cost of the public project, or the time it takes to complete it), we have eminent domain where by force of law the government condemns the property and takes it without having to resort to that inconvenient negotiating procedure. Now, I don’t want to comment on that idea per se. I wanted to point one small thing out about it.

Even allowing for the possibility that the holdout problem is real and costly (I have some suspicions about this), might it not be the case that Eminent Domain nonetheless fails a societal benefit and cost test? Why? Because the cost of eminent domain may extend far beyond the immediate takings – even if people are adequately compensated.

The mere existence of eminent domain strikes fear and uncertainty into the hearts and minds of thousands of people. And the people most at risk are those living in poorer and “blighted” areas. Not only is this fear an important cost which ought to be considered, but it also promotes poor long term incentives for development and improvement of an area. Why would you spend lots of time renovating your house and making it into your home in the inner city, when at any given time Pfizer can influence city council to condemn your land to make way for an R&D lab? Or why form neighborhood associations when at any time some of the neighborhood can be bulldozed away to make way for nicer affordable housing projects? The mere threat of uncertainty has been enough to cripple entire economies and it is one reason that both the Great Depression and the current downturn are argued to have lasted as long as they have. Is it not entirely plausible that this is a large cost in many parts of America which can use a little bit more certainty?

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