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Taking the Castle: Efficiency and the Vibe of It

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  • Shapiro, Perry

Abstract

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.

Suggested Citation

  • Shapiro, Perry, 2002. "Taking the Castle: Efficiency and the Vibe of It," University of California at Santa Barbara, Economics Working Paper Series qt442909rh, Department of Economics, UC Santa Barbara.
    • Handle: RePEc:cdl:ucsbec:qt442909rh
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    References listed on IDEAS

    as
    1. Lawrence Blume & Daniel L. Rubinfeld & Perry Shapiro, 1984. "The Taking of Land: When Should Compensation Be Paid?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(1), pages 71-92.
    2. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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