When acquiring private property, governments may exercise one of three options: confiscation, consensual exchange, or eminent domain. Under the first approach, the government can confiscate private land without seeking consent from private owners and without paying compensation to them. Alternatively, under the consensual exchange approach, the government can only acquire private property through arm’s-length negotiations in an open market. It requires the government to obtain consent from private owners and pay mutually agreed purchase prices, determined by both the government as a willing buyer and private owners as willing sellers. The third approach is through eminent domain, which denotes when the government can take private properties for “public use” without owner consent. The government can either use the threat of eminent domain to hasten “negotiations” or exercise its sovereign power to take properties outright and provide the owners compensation as set by third parties. These third parties usually consist of appraisal firms that calculate the amount of compensation based on market value. Eminent domain proceedings, as typified by language in the Fifth Amendment of the U.S. Constitution, require that: (1) the property must be for public use; and (2) the owner of the property must be provided with just compensation.

Theoretically, the government should only use eminent domain proceedings in situations that involve a bilateral monopoly problem. In practice, however, a government often remains the sole authority to interpret what constitutes a bilateral monopoly situation; in other words, the government gets to say how much is too much. In developing economies, such as China, governments rarely opt to use methods other than exercising eminent domain power because they regard almost all land acquisitions as situations involving bilateral monopoly. Most importantly, governments are convinced that using eminent domain power is the most efficient way to cut the costs for economic development.