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Unpublished Paper
Applying Marginal Cost Pricing: Efficiency and Fairness in Takings and Land Assembly, and Accuracy in Assessment, All in One Fell Swoop
ExpressO (2009)
  • Florenz Plassmann
  • Nicolaus Tideman, Virginia Tech

Government officials who sidestep markets to take private property under eminent domain face obstacles that make it difficult for them to identify socially efficient takings. When they decide that they might take certain properties in the future, they may induce the owners of these properties to invest in their properties inefficiently, to prevent the taking. When they make final decisions about whether to take property, they may not know the property value with enough accuracy to determine whether the taking is socially worthwhile. And when they consider using their powers of eminent domain in urban renewal projects to resolve deadlocks between developers who want to assembly multiple properties and owners who refuse to sell at prices that developers offer, they need to know whether the owners’ refusals to sell constitute true expressions of the value of property to owners or holdout behavior that threatens to prevent socially valuable redevelopment. The thesis of this article is that all of these problems can be resolved in simple and intuitive ways through the application of a single concept—the economic principle of marginal cost pricing. We present two mechanisms that assign, to all parties involved, the marginal costs of their actions, and we show how marginal cost pricing leads to social efficiency in taking cases. Our first mechanism illustrates that a requirement that governments fully compensate owners for their losses—including losses that result from the announcement of the possibility of a future taking—provides government officials with the incentive to announce their best estimates of the probabilities of future takings and owners with the incentive to manage their properties efficiently until final taking decisions are made. Our second mechanism illustrates that marginal cost pricing can provide owners with an incentive to truthfully disclose their own private valuations of their properties. We show that not only does this mechanism enable governments to determine whether it is socially efficient to take these properties while compensating owners for all of their losses, but it also solves the problem of holdouts in land assembly projects without the need for government takings. In contrast to similar mechanisms that have been proposed before, our mechanisms neither require information that is usually unavailable nor intrude on property rights beyond what is inherent in the power of eminent domain. Thus we argue that both mechanisms constitute feasible and attractive opportunities to bring social efficiency to takings.

  • Eminent Domain,
  • Self-assessment,
  • Land Assembly,
  • Holdout Problem
Publication Date
February 24, 2009
Citation Information
Florenz Plassmann and Nicolaus Tideman. "Applying Marginal Cost Pricing: Efficiency and Fairness in Takings and Land Assembly, and Accuracy in Assessment, All in One Fell Swoop" ExpressO (2009)
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