law and economics-charles w. upton takings. when the government takes property, the constitution...

Law and Economics-Charles W. Upton

Takings

Takings

Takings

• When the government takes property, the Constitution requires that “just compensation”. – The government exercises its power of eminent

domain, condemns the property and then pays the fair market value.

Takings

An Example

• A city wants to build a fire station on Sam’s property. – It sees benefits (use value) of $70,000.– While the market value of the property is

$50,000, Sam would would want $80,000 to compensate him for his use value.

Takings

An Example

• A city wants to build a fire station on Sam’s property. – It sees benefits (use value) of $70,000.

– While the market value of the property is $50,000, Sam would would want $80,000 to compensate him for his use value.

• In general, however, the city can take the property for $50,000, the fair market value, reducing the use value form $80,000, to $70,000.

Takings

An Example

• A city wants to build a fire station on Sam’s property. – It sees benefits (use value) of $70,000.

– While the market value of the property is $50,000, Sam would would want $80,000 to compensate him for his use value.

• In general, however, the city can take the property for $50,000, the fair market value, reducing the use value form $80,000, to $70,000.

This is not Hicks-Kaldor efficient.

Sam loses $30,000; the city gains $20,000.

Takings

An Example

• A city wants to build a fire station on Sam’s property. – It sees benefits (use value) of $70,000.

– While the market value of the property is $50,000, Sam would would want $80,000 to compensate him for his use value.

• In general, however, the city can take the property for $50,000, the fair market value, reducing the use value form $80,000, to $70,000.

This is not Hicks-Kaldor efficient.

Sam loses $30,000; the city gains $20,000.

The alternative would be to require the city to pay Sam its true value, but only Sam knows its

true value. He has every incentive to

overstate its value in any litigation.

Takings

Owner Fair Market Value

Use Value to the Owner

Use Value as a fire Station

Sam Jones

$50,000 $80,000 $70,000

Mildred Brown

$55,000 $60,000 $68,000

Takings

Owner Fair Market Value

Use Value to the Owner

Use Value as a fire Station

Sam Jones

$50,000 $80,000 $70,000

Mildred Brown

$55,000 $60,000 $68,000

The Right Choice

Takings

Owner Fair Market Value

Use Value to the Owner

Use Value as a fire Station

Sam Jones

$50,000 $80,000 $70,000

Mildred Brown

$55,000 $60,000 $68,000

The Right Choice

The City’s Choice

Takings

The Case for Eminent Domain

• Indispensable property.

Takings

The Case for Eminent Domain

• Indispensable property.– There is only one property that would do the

job. A mountain pass where a fort must be built to protect against invasion.

Takings

The Case for Eminent Domain

• Indispensable property.– There is only one property that would do the

job. A mountain pass where a fort must be built to protect against invasion.

• When multiple properties must be purchased.

Takings

The Case for Eminent Domain

• Indispensable property.– There is only one property that would do the

job. A mountain pass where a fort must be built to protect against invasion.

• When multiple properties must be purchased. – There may be a transactions cost argument

Takings

Eminent Domain for Private Use

• The taking power is used sometimes to take property from one person to another.

Takings

Eminent Domain for Private Use

• The taking power is used sometimes to take property from one person to another. – Urban renewal.– Condemnation of land for a baseball field.

Takings

Eminent Domain for Private Use

• Sam Jones owns property that the market values at $40,000.

Takings

Eminent Domain for Private Use

• Sam Jones owns property that the market values at $40,000. – The use value to him is $80,000.

Takings

Eminent Domain for Private Use

• Sam Jones owns property that the market values at $40,000. – The use value to him is $80,000. – Sally Smith wants the house and the use value

to her is $90,000. .

Takings

Eminent Domain for Private Use

• Sam Jones owns property that the market values at $40,000. – The use value to him is $80,000. – Sally Smith wants the house and the use value

to her is $90,000. – A deal can clearly be struck for (say) $85,000.

Takings

Eminent Domain for Private Use

• Sam Jones owns property that the market values at $40,000. – The use value to him is $80,000. – Sally Smith wants the house and the use value

to her is $90,000. – A deal can clearly be struck for (say) $85,000. – But suppose Sally Smith gets the state to

condemn the property for $50,000 and then sell it to her.

Takings

End

©2004 Charles W. Upton