Eminent Domain and the Problem of Government

In our forthcoming paper at the Review of Law & Economics, “The Long-Term Impact of Kelo v. City of New London: Comparing State Legislative and Judicial Responses”, my former Western Carolina University colleagues Ed Lopez and H. Justin Pace and I discuss justifications for eminent domain.[1] Primarily, we discuss the holdout problem. The holdout problem describes a rent-seeking seller who holds off selling to maximize their gain, but at the expense of the entire project. Eminent domain can be used to overcome this challenge, in which case, eminent domain can be welfare-enhancing. (This post is not about the holdout problem. For details, see Section 2 of our article.)

Related to the holdout problem is the problem that occurs when the cost of negotiating may be prohibitively high for a necessary public works project. (Indeed, I’d argue this is the best use of eminent domain, but that is neither here nor there.) Take, for example, an old city, say Boston. Boston was founded in the 1630s, a period long before the benefits of modern sanitation and sewer systems were understood. Boston grew and grew, and consequently so did human waste and sanitation needs. Eventually, we discovered that dumping human waste in the streets and rivers was not the best idea, and cities began constructing the modern wonder that is a sewer system.[2] But, by the time the modern sewer system of Boston began construction in 1877, the city was already good-sized: some 46,000 people lived there. There were many property owners involved whose property may need to be infringed upon to connect this system and make Boston healthier.

Negotiations among all these owners would likely have been prohibitively expensive (even excluding the problem of holdouts or strategic bargaining). Consequently, at several times during the process, the city invoked eminent domain to take necessary actions (the powers are now codified in Title XIV, Chapter 83 of the Massachusetts General Laws). This is likely a good use of eminent domain powers: a general case of improving general welfare (as opposed to the more squishy “social benefits exceed social costs” used by some economists). Here, eminent domain represented the least costly way to achieve the goal. Other old cities around the world likely faced the same issues and used eminent domain to manage them as well.

But does this case mean that eminent domain for a sewer system is always a good thing? For the sake of answering this question, let’s assume that a sewer system construction is in and of itself an improvement in general welfare.

I argue that the answer to my question is “no.”

Let’s move away from old cities and say we want to create a new city: Murphopolis. Murphopolis will be somewhere in the vast Arizona desert. Some 46,000 people journey to the middle of that desert and, among the spiders, scorpions, and blazing heat, start building a town. In 2025, the benefits of a sewer system are well-known. In the construction of this city, eminent domain is not necessary: property contracts can be written to incorporate the necessary easements and connections. The sewer system can arise naturally. Indeed, one may not even need a government-run or -provided sewer system at all! Anyone wanting to invoke eminent domain for a sewer project should face a higher standard of scrutiny.

Moving to the more general problem of government, many advocates for government actions simply point to the action being used in the past to solve some problem and then conclude that the same action is appropriate. But the time and conditions of the current problem are not the same as in the past. Just because eminent domain was a good solution for Problem A does not mean it is a good solution for Problem B. Using eminent domain to build the Boston sewer system is beneficial; using it to build the Murphopolis sewer system is likely harmful.

Thus, what I see as a problem of government: the proper use of its power, as opposed to power’s haphazard use. Government does have a positive role to play. But those “men of system” (to borrow Adam Smith’s phrase) undermine the good of government by using it haphazardly.[3]

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[1] Ed discusses the paper more generally here.

[2] I do not use “wonder” lightly. Think about it: we all have these tiny holes in our home that we put waste, contaminants, and non-potable water into and it gets whisked away to be properly treated and disposed. Think of how much cleaner and safer our lives are! How many have been spared horrible deaths or illness from diseases like cholera, dysentery, and other water/food/waste born illnesses simply by taking the sources away via these little holes?

[3] As a final aside, I’d argue that most of the evils of government come not from intentional abuse of power by evil men, but rather by this haphazard approach to government. Like a child playing with a loaded gun, their misconceptions and ignorance can lead to terrible consequences not intended.