In our upcoming study published in the Review of Law & Economics, titled “The Long-Term Impact of Kelo v. City of New London: Comparing State Legislative and Judicial Responses,” my colleagues Ed Lopez and H. Justin Pace from Western Carolina University and I delve into the rationale behind eminent domain. One of the key issues we explore is the holdout problem, where a seller withholds their property to maximize personal gain, inadvertently hindering an entire project. In such scenarios, eminent domain can serve as a solution, potentially enhancing societal welfare.
(For a detailed discussion on the holdout problem, I recommend checking Section 2 of our article.)
Closely tied to the holdout issue is the challenge posed by the exorbitant costs of negotiating with multiple property owners for vital public works. (In fact, I would argue that this represents the most justifiable use of eminent domain, but that’s a tangent we’ll sidestep for now.) Consider an aging city like Boston, founded in the 1630s, well before the virtues of modern sanitation were appreciated. As Boston expanded, so did its sanitation challenges. It was eventually realized that dumping human waste in streets and rivers wasn’t the pinnacle of urban planning, leading to the construction of the sewer system we now take for granted.
However, by the time Boston began installing its sewer system in 1877, the population had already ballooned to around 46,000. This meant numerous property owners might need their land infringed upon to connect the sewer system and improve public health.
Negotiation with all these owners would likely have been prohibitively expensive (and that’s excluding the complications of holdouts or strategic bargaining). Consequently, the city resorted to eminent domain at various junctures during the project (these powers are now outlined in Title XIV, Chapter 83 of the Massachusetts General Laws). This instance is a textbook example of a beneficial use of eminent domain: a clear case of enhancing general welfare, rather than the somewhat nebulous “social benefits exceeding social costs” that some economists propose. Here, eminent domain was the most economical means to achieve a healthier Boston. Other historic cities around the globe likely faced similar dilemmas and employed eminent domain to address them.
But does this scenario imply that eminent domain for sewer systems is universally beneficial? To tackle this question, let’s posit that constructing a sewer system inherently enhances general welfare.
I contend that the answer is “no.”
Let’s shift our focus from established cities to the hypothetical creation of a new city: Murphopolis, situated in the vast Arizona desert. Imagine 46,000 brave souls venturing into this arid expanse, surrounded by spiders, scorpions, and searing heat, to build a town. By 2025, the advantages of a sewer system are well-documented. In this new city, the need for eminent domain is virtually eliminated: property contracts can be drafted to accommodate necessary easements and connections. The sewer system can develop organically. In fact, it could be argued that a government-provided sewer system might not even be necessary! Anyone advocating for the use of eminent domain for such a project should face a significantly higher standard of scrutiny.
More broadly, the issue at hand with government actions is this: many proponents simply reference past actions that addressed certain problems and conclude that those actions are still appropriate today. However, the circumstances and context of contemporary issues often differ vastly from those of the past. Just because eminent domain effectively solved Problem A does not guarantee it will be a suitable remedy for Problem B. Using eminent domain to establish Boston’s sewer system was beneficial; employing it for Murphopolis’s sewer system could likely have adverse effects.
In conclusion, I see this as a critical challenge for government: ensuring the judicious use of its powers rather than their arbitrary application. While government can play a constructive role, those “men of system” (to borrow a phrase from Adam Smith) can undermine this potential by wielding power indiscriminately.
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[1] Ed discusses our paper in broader terms here.
[2] I do not use the term “wonder” lightly. Consider this: we have tiny openings in our homes where we dispose of waste, contaminants, and non-potable water, which are then whisked away for proper treatment and disposal. Think about the cleanliness and safety these systems provide! How many lives have been saved from deadly diseases such as cholera and dysentery simply by removing those hazardous materials through our plumbing?
[3] To further elaborate, I believe that most governmental failures stem not from the deliberate abuse of power by nefarious individuals, but rather from this erratic approach to governance. Much like a child playing with a loaded weapon, their ignorance can result in unintended but dire consequences.
