THE ECONOMICS OF COMPENSATING PROPERTY OWNERS

I. INTRODUCTION A contentious current policy question is whether the federal government should regulate land in the public interest at public expense or at the expense of the landowner. That is, when land use options are restricted by regulation in the public interest, should the landowner be compensated for the loss? Much of the disagreement concerns two regimes of land use regulation: (i) the protection of species listed as threatened or endangered under the Endangered Species Act (ESA), administered primarily by the U.S. Fish and Wildlife Service (FWS), and (ii) wetlands protection under Section 404 of the Clean Water Act, administered primarily by the U.S. Army Corps of Engineers. Supporters of compensation say that when government regulation is for the purpose of producing a public good, then landowners should be compensated for the use options taken from them. They argue that the takings clause of the Fifth Amendment to the Constitution of the United States, which states: "nor shall property be taken for public use without just compensation," demands that compensation be paid. Many also argue that Congress should make this clear to agencies (and to the courts) by legislating a requirement that within certain limits, regulation taking land use options from owners must result in just compensation to the affected owner. The production of public goods, this side argues, is best done through markets, in which property rights are respected and government action is taken after budgets are set and resources can be purchased, leased, or rented. They claim that the unintended consequences of regulation often harm the goals on which the regulation is based. In this view, the market exchange of rights is expected to provide both better results and lower social costs, compared to the use of central planning and command-and-control regulation. Opponents of compensation say that there is no need to pay landowners to do what the government has determined is the right thing, and that to pay compensation would be unjust and also costly in the extreme. Instead, in this view, the rights of the community should give government the power to limit the property rights of individuals. Some opponents add that to compensate everyone whose property is devalued by regulation would entail paying polluters not to pollute. Democratic government using central planning can work well in regard to environmental issues. Importantly, in this view, forcing compensation would, by the budget process, wrongly limit the ability of government officials who are trying to protect the public from the loss of benefits currently received from private lands. Besides, they add, regulation often provides benefits which offset the costs, even to the affected landowners. This article reviews the basis for compensation and the basis for refusal to compensate, sorts out some of the arguments heard most frequently, applies economic reasoning, and provides examples. The treatment here is an overview. More detailed attention to aspects of these issues occurs elsewhere in the academic literature (e.g., Fischel, 1995; Miceli, and Segerson, 1996). II. THE CASE FOR PROPERTY RIGHTS, MARKETS, AND TAKINGS COMPENSATION Since at least the time of Adam Smith, economists have recognized that market transactions are exceptionally productive in reconciling private desires with public purposes. For example, when property rights to land are properly enforced, land users must pay for what they use and therefore will economize on their land use; land owners searching for high bids have a strong incentive to find those with highly valued uses and to make land available to highly valued uses now (for revenue) and in the future (to protect current asset value). When the property rights of owners are not respected and enforced, problems probably will occur: low-valued uses may claim the land, polluters may harm it with impunity, and the land market (the land's asset value) will not provide proper incentives for land conservation. …