2  The case for and against takings

Arguments for and against takings centre on the most basic principles of private rights and public needs. The argument for allowing state takings is that in their absence a significant public benefit would be frustrated. This requires that the activity cannot be progressed without use of that right, it is unavailable without state coercion and there is a net social benefit from the activity.

That unavailability could be a choice by owners of property rights. That choice could be because owners do not want to part with the right or, because they are attempting to capture such a high share of the benefits that the project would not be viable. The latter case represents the “hold out” problem.

Alternatively, the right could be unavailable because the transaction costs of arranging the transaction are so high as to preclude a voluntary exchange – this could be due to a market failure such as imperfect competition or imperfect information (Miceli and Segerson, 1998), or simply due to the number of people involved. The economic concept of a public good is relevant here, as high transaction costs or the free rider problem could limit provision.[9]

A classic example of a taking is where a road must follow a particular route. The state, if negotiations fail, acts to acquire the land by compulsion but compensates the land owner for their loss. Why compensation is paid, and how much is due, will be discussed later in this paper.

The use of eminent domain by private entities to provide public services creates concern, as the powers of the state are being used for the benefit of private parties. Existing utilities, however, have used these powers to establish their networks (at which time they may have been state entities, as they were in New Zealand) and may depend on them for continued access, although possibly as a last resort given statutory requirements for using them and the potential for controversy. There may also be a public interest in continuing such powers to allow existing firms to maintain network stability and so new firms can enter the market (Wilkinson, 2001); ie, for competition reasons. Roads and public utilities also carry a degree of public benefit regardless of who is operating them.

Public interest can also be a flexible concept with the power of eminent domain used for commercial development that is argued to be in the public interest. This is a common issue in the US:[10] for example, in two prominent cases “New York City also recently announced its plan to condemn a block in the Times Square area for a new building for the New York Times[11]“ and a similar plan has been announced for the New York Stock Exchange.[12]

This wider interpretation of the public interest raises obvious concerns, but these can be considered within the same overall framework as what are clearly public works; ie, has a taking occurred and is compensation required? A public interest restriction on takings of land, if practical, would resolve this issue in that specific context, but whether government powers in general should be used for private interests is a wider issue not within the scope of this paper.[13]

A pure approach could suggest that eminent domain should only be applied to hold out situations where it is a necessity, there is public access to the resulting activity and the resulting surplus is shared proportionally between the parties to a forced exchange. On this basis, the essentiality of an activity and the inability to achieve a voluntary outcome might represent a form of public benefit test that could be practically implemented (Wilkinson, 2001).

The existence of a takings power assumes that there are circumstances where the public benefit of over-riding property rights exceeds the public and private benefits of protecting those rights. Giving the state, or its agents, any ability to carry out takings still, however, carries risks. Arguments for limiting the ability of governments to carry out takings usually focus on two main aspects, constitutionality (common law, natural rights and liberty, democracy) and efficiency (Wilkinson, 2001 and Epstein, 1999).

The primary means of avoiding abuse of the takings power are to limit its scope, constrain the processes through which it can be exercised, and to require payment of compensation. The first two points are addressed later. The latter is the subject of the next section.