Department of Economics

The owners of property taken for public use are often compensated for their loss. Compensation based on market value is known to create a moral hazard problem and induce inefficient investment. However, no compensation, while efficiency inducing, is not a feasible, or desirable alternative, because it is perceived to be unfair: individual landowners crushed under the governmental leviathan. An alternative is proposed for public projects (as road construction) for which all benefits are incorporated in land values. In this case compensation based on the value of a property had it not been taken, rather than its market value prior to the public project, is both efficient and fair.