Monday, February 27, 2006

Oregon's Anti-Regulatory Takings

"Oregon's ballot measure, which passed with a mere 61% of the vote, required authorities to either compensate landowners for any reduction in the value of their property, or exempt them from the regulations. This was the second time voters had passed the measure, the first version having been tossed out on a technicality by the state's notoriously liberal Supreme Court."
OpinionJournal describes the Oregon measure as "anti-Kelo," but it seems to me it is anti-regulatory takings. It seems to me regulatory takings should, in general, fit within the Takings Clause, and the Oregon measure which was approved by a significant majority of voters seems to say so too.

[The Anti-Kelo Case: Oregon offers the nation a model for reform, OpinionJournal, Thursday, February 23, 2006 12:01 a.m. EST]

Thursday, February 16, 2006

Kelo Economics?

Lior Strahilevitz makes what sounds like an economic argument in favor of the Kelo opinion:
Suppose that a wealthy nihilist owns a Frank Lloyd Wright home and announces a completely credible intention to burn it down. Should the state be able to condemn the property and, upon paying the nihilist fair market value, transfer it to the Frank Lloyd Wright Trust, a private entity that announces (again, completely crediby) an intention to turn it into a museum?

The holding of Kelo (and earlier cases like Berman v. Parker) suggest an affirmative answer, and I believe that the state should be able to use the eminent domain authority to condemn the home from the nihilist and transfer it to the preservationist. There is a strong economic argument for liability rule protection in this hypothetical, as opposed to property rule protection. There are probably enough people (neighbors and non-neighbors) who would derive substantial 'existence value' from knowing that the home survives and value the option of being able to drive by it or take a tour to outbid the nihilist in a world of no transaction costs. But high transaction costs will probably prevent those people from getting together and outbidding the nihilist for the home, even though they are the highest value users. So unless there are a large number of nihilists out there who derive 'non-existence value' from the home, it would seem that using the government's eminent domain authority to preserve the home is welfare maximizing.

[. . . .]

. . . . Preserving the home is its higher value use, and the government is merely acting to transfer property to a higher value user. . . . .

[. . . .]

. . . . I believe that thoughtful people tolerate eminent domain for the purpose of creating roads or airports because they recognize that these types of uses will usually enhance social welfare, and they resisted the use of eminent domain in Kelo based on skepticism about whether the government was a good agent for the public's interests there. . . .
I take the author's argument to be an economic argument because of his use of the concepts of existence value, option value, and highest valued use. Further, I assume the normative framework he is relying upon is that of economic efficiency. I believe his analysis is incorrect on efficiency grounds.

The analysis assumes there is both a significant option value and existence value associated with the home. This implies a positive externality market failure. I assume, therefore, that these conditions suggest that destroying the home would not be the highest valued use of the property. I disagree that the proper policy response, based upon efficiency, is for government to take the home and transfer it to someone who promises to preserve the home.

The general story I tell with respect to positive externalities is that the government's policy response should be to cause the marginal external benefit to become internalized in market prices. This can be done by government subsidizing the market activity that generates the positive externality. The story about the economics of positive externalities is usually not that government policy should take the market activity from private individuals and give it to those in the community who are enjoying the external benefit. Actually, I don't think I've ever heard policy proposals for positive externalities that sound like this.

I suggest that the economic efficiency analysis of this hypothetical would imply that government should offer an annual subsidy to reflect the existance value plus the option value enjoyed by others in the community because of the home. Such a policy would result in the present owner of the property seeing the value enjoyed by others in the community because of his home. This is exactly the mechanism by which positive externalities become internalized and efficiency can be achieved.

I suppose, given the nature of this hypothetical, that the owner of the home might not see the annual subsidy a sufficient incentive not to burn his home. Yet, if this were the case, and if we were to assume that government figured out the correct value of the external benefit, then I think we would have to say the owner's use of the property was the higher valued use vis a vis preservation of the home. There would be an additional consideration here as well. There would be a good chance (it seems to me) that when government offered to pay an annual subsidy for preservation of the home that one result would be an increase in demand for the property. Someone might well choose then to offer a sufficient amount to the home owner to successfully purchase the home, convert it to a museum, and collect the annual subsidy as well as the annual revenue from operation of the home as a museum.

I believe there is another possible efficient policy response by government to the positive externality posed here. Government could purchase the property from the person who owns the property. Of course, this starts to encourage us to think of the efficient policy being the use of eminent domain. That is, the home's owner has refused to accept "fair market value" to sell the home, and this is the reason it is suggested that taking the home can cause the property to be transferred to a higher value use. Would the efficiency analysis in this case suggest that government should only offer to pay "fair market value" to obtain the home? I think not. After all, this case is one of a positive externality and that means that there is a divergence between marginal private benefit and marginal social benefit, and the "fair market value" is going to reflect only the lower marginal private benefit. For efficiency, government's offer price should be up to the full marginal social benefit, which according to the assumptions of the hypothetical is a value that is significantly greater than the fair market value.

Of course, there is still the possibility that the owner of the home will not sell. Once again, this would imply that the higher valued use of the property was with the present owner. I suppose one might hear the suggestion that, as the author of the analysis suggests in his update, the owner of the home is a nihilist who holds antisocial preferences. On this the author suggests:
Where people have antisocial preferences of this kind, we might worry about whether they'll negotiate optimally . . . .
I believe such a suggestion neglects a fundamental value judgment upon which economic efficiency analysis is based. Efficiency analysis specifically takes individual preferences as given, and as such, efficiency analysis does not judge whether an individual's preferences are good or bad. Deciding to describe the preferences of the home owner as antisocial seems to me to judge the owner's preferences. If the owner will not sell when the price offered includes the full marginal social benefit associated with the preserved home, then I think the safest conclusion for efficiency analysis is that preserving the home is not the most highly valued use of the property.

I think that efficiency analysis of this hypothetical suggests another very important point. The takings clause requires "just compensation" when government takes private property for public use. I will take it for granted that if government took the home in question and then created a publicly owned and operated museum that preserved the home, the government would be taking private property for public use. For this taking to be constitutional, compensation would have to be "just." What is just compensation in this case? Is just compensation in this case "fair market value?" I think efficiency analysis would suggest that it is not. If we are going to justify the use of eminent domain to correct the market failure of a positive externality, then it seems to me we have to recognize that "fair market value" is not the full economic value of the property. The full economic value of the property is the marginal social benefit, and this value is assumed in our hypothetical to be significantly greater than the market value. Therefore, it seems to me, just compensation for this taking should be defined in terms of the full social benefit of the preserved property.

On efficiency grounds, for the hypothetical being discussed, I conclude that the best efficiency policy is for government to offer a subsidy for preservation to reflect the marginal external benefit associated with option and existence values. I might be willing to accept the idea that the power of eminent domain is also consistent with efficiency, but ONLY IF "just compensation" is defined to reflect the external benefit not reflected in the market value of the property.

Finally, I want to say something that moves me away from economic efficiency analysis. Professor Strahilevitz writes:
I believe that thoughtful people tolerate eminent domain for the purpose of creating roads or airports because they recognize that these types of uses will usually enhance social welfare . . . .
The Takings Clause does not mention enhancing social welfare. It says private property can be taken for public use, not for enhancing social welfare. I suspect those who wrote and those who ratified the Takings Clause got it right. I suspect people "tolerate eminent domain" for roads and airports because roads and airports are public uses of the property. I can't prove it. But, I suspect that people grant the power of eminent domain to government when the property becomes a road or an airport because they realize they are very likely to use both, just like every other person in the community. And, of course, use of the power of eminent domain is supposed to be constrained by government having to paying just compensation. For people to tolerate the power of eminent domain I suspect it must also be the case that the compensation provided be government must truely be a just compensation.

Wednesday, February 15, 2006

Baseball Fields & Swimming Pool

The Desert Sun
February 15, 2006
For the second time in the 18 years since the controversial John Nobles Ranch neighborhood was razed, the city may pursue eminent domain for a major city project other than road widening.

With more than a third of the city's burgeoning population under 18, according to the U.S Census Bureau, Indio officials want to provide more recreation for youths and plan to build a 45-acre sports complex that would feature an Olympic-size pool and four full-sized baseball diamonds.

The city is gearing up for eminent domain proceedings to make the park a reality for its 66,000 residents, which city officials say could reach 131,000 within five years.

Eminent domain is the right of a government agency to claim and buy private property for public use."
Here again eminent domain is referred to as a government right. Government doesn't have rights. People have rights. Government has the power of eminent domain to take private property from people.

Mercedes Dealership (2-15-2006):
"Grill owner fights eminent domain
By Gene Maddaus Staff Writer

ARCADIA - The owner of Rod's Grill wants voters to block a redevelopment deal that would bulldoze his restaurant and a handful of other properties to make way for an expanded Mercedes-Benz dealership. Manny Romero is circulating petitions for an initiative for the November ballot. He said he is confident because he has received support from his customers."

[. . . . .]

The city has proposed using eminent domain to seize the restaurant parcel. The City Council is expected to consider whether to pursue that approach at its March 7 meeting. The city has negotiated with other property owners, including the Church of Arcadia and a self-storage business, in its effort to expand the Rusnak Mercedes dealership. The city also has talked about buying the Elk's Lodge . . . . . '

Friday, February 10, 2006

Tenant, 93, wins Ga. eminent domain case
Friday, February 10, 2006

Tenant, 93, wins Ga. eminent domain case


ALBANY, Ga. -- A jury decided that a Georgia hospital is going to have to pay nearly five times what it offered if it wants to condemn a rental house where a frail, 93-year-old woman has lived for nearly three decades.

The jury said Thursday that Phoebe Putney Memorial Hospital would have to buy the 60-year-old brick duplex for $200,000 - it has been appraised at $50,000 to $60,000 - and give the tenant $51,000 to help her move from her home of 26 years.

'It just proves that no one can assume absolute power over someone's life without having to answer to the legal system,' said attorney Eddy Meeks, who represented the tenant, Julia Lemon, and the home's owner, Julie Montgomery.

Lemon, who walks with a cane, said she wished she could stay in the home.

'I lost my husband, a son, my daughter and a granddaughter while I was living here. So I've got a lot of memories, some happy, some sad,' she said as she watched television from an easy chair in a bedroom.

Phoebe, southwest Georgia's largest hospital, condemned the property last year so that it could expand a child development center for employees' children. Phoebe officials said they may appeal the verdict.
A couple of notes: (1) Let's be a bit more accurate. In essence a jury decided that compensation for taking the woman's home would have to be about 5 times what government had offered for it. (2) I wonder if this 5 to 1 ratio between court determined just compensation and the government offer is at all typical?

Tuesday, February 07, 2006

Compromise Proposed In New London

From the Washington Post:
"The mayor of New London, where a fight over government seizing property led to a controversial U.S. Supreme Court ruling, is proposing a compromise for a group of homeowners.

Under a plan presented to the City Council Monday night, four people whose homes were seized for a private development would be allowed to stay. The city would own their properties and the residents would have to pay the city to live there."
What? Are you kidding me? Maybe I don't understand the meaning of the word "compromise?" Let's see, government takes a person's property, pays the person some money (which I think is likely to be less than the economic value of the property), and then says to this person: "Oh, don't worry you can still live in what you thought was your home and pay us rent." I see. I guess that is a compromise.

And, there's this:
"But she and another plaintiff, Michael Cristofaro, said they aren't interested in paying rent for homes they owned."
Oh, so the people who had their property taken by the city don't think this is a compromise either, eh?