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UW-Madison ECON 522 - ECON 522 Lecture Notes

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Econ 522 – Lecture 8 (Sept 25 2008)Tuesday, we discussed- Limitations on property rightso the costs of forced bequestso laws against perpetuities (the inability to permanently restrict your heirs)o rights to use others’ property in an emergencyo inalienability (the inability to sell something)- And we went back over remedieso the principle that injunctions are generally more efficient as a remedy for private nuisances, and damages are generally preferable for public nuisanceso temporary and permanent damageso discussed the Boomer case, where the court refused an injunction, even though that was the usual ruling, because of the asymmetry of the situationToday, we’ll wrap up property law- Takings, limitations/abuses, Poletown case (also Kelo)- Regulation, regulatory takings – Pennsylvania Coal v Mahon, Blume and Rubinfeld, Nollan v California Coastal CommissionTakings.- A couple weeks ago, we discussed the fact that when public goods are privately provided, they tend to be undersupplied- It follows, then, that one important role of government is to provide public goods- Defense; roads and other infrastructure; parks; to a certain degree, art and science;lots of public goods are, and should be, provided by the government.- In order to provide these things, the government sometimes has to use land which would otherwise be private property- In some cases, the government can simply negotiate with the owner to buy this land- But as we’ve discussed, it’s very hard to negotiate with a large number of people at onceo if the government needs to buy a large area of adjoining land, which is currently owned by many different people, it may be impossible to negotiate the sale voluntarily.o (As we’ve seen, individual landowners may hold out, hoping to get inflated prices once most of the other land has already been bought up.)- In most countries, the government has some right to seize private property even when the owner doesn’t wish to sell– this is referred to as the right of “eminent domain”- Not too surprisingly, this type of seizure is called a “taking”- In the U.S., takings are limited by the Fifth Amendment to the Constitution, whichattaches two conditions:o private property may only be taken for public useo and only be taken with just compensation- “Just compensation” has consistently been interpreted to mean “fair market value”– that is, what the owner would likely be able to sell the property for. This may be less than his subjective value for it, or the price he would voluntarily accept- The need for a right to government takings, and the limiting of compensation to fair market value, is fairly clearo Calculating someone’s subjective value directly would be impossibleo and allowing the owner to name his price would be the same as removing the power of eminent domain and simply requiring the government to buy property openly. o In situations where many possible sites are available, this might be fine.o But in a situation with only a single possible location for a valuable public good, the owner of the property could demand an unreasonable price (not because he valued the property that highly, but because he thought the government would pay it).o Similarly, if lots of adjacent bits of land were required (say, to build an airport), some owners might hold out, hoping to get high prices once most of the property had been bought up.o The government would then have to either fund the purchase through higher taxes (basically, redistributing wealth from all of society to one person who is already probably relatively well off since he owns property), or fail to provide a valuable public goodo So public goods would continue to be underprovided, which is the situation we were trying to avoid.- So the rationale for allowing takings, and limiting compensation to fair market value, is pretty clear- The two limitations on government takings – that the government can only seize private property for public use, and only with compensation – seem to agree with some notion of fairness.- But they also serve another purpose – to discourage the government from abusing this power- If the government could seize private property without compensation, this would give it another way (besides taxes) to finance itselfo Uncompensated takings would function like taxes targeted at specific individualso But we come back to the general principle that the more narrow a tax is, the more distortion it causes, because people will go to greater lengths to avoid paying the tax, which makes it inefficiento The more broad a tax is, the less distortion it causes, and therefore the less inefficiency.o So the government should be discouraged from using takings as a source of financing, which is ruled out by requiring compensation.- (If compensation were not required, this would lead people to take costly actions to make their property less attractive to the government. That is, if the government were looking for a suitable place to build a park, people who lived in attractive locations might start cutting down their own trees, or spilling chemicals on their lawn, to make sure that the government didn’t go after their property. Uncompensated takings would also encourage corruption, as owners would be willing to pay large amounts of money to influence the government’s choice of which property to seize. If people value their own property more highly than “fairmarket value,” this type of corruption is still a risk with compensated takings, but on a much smaller scale.)- (Posner, in “Economic Analysis of Law,” makes the additional point that if compensation were not required, the government might substitute land, which it could get for free, for other inputs, which are cheaper than land in reality, but more expensive to the governmento He gives the example: suppose the government has a choice of putting up a tall but narrow building on a small lot, and a short but wide building on alarge lot. The market value of the small lot is $1 million, and of the largelot $3 million. The tall narrow building costs $10 million to build and the short wide one $9 million. He points out that in social costs, the short wide building costs $12 million and the tall narrow one $11 million, so society is better off with the tall narrow one. But if land is free to the government, it might seize the larger lot and build the short, wide building.)- The restriction of takings to be only for


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UW-Madison ECON 522 - ECON 522 Lecture Notes

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