Eminent Domain, Just Compensation, and a Raw Deal for Homeowners

When the State of Maine builds the I 395-Route 9 connector road, reportedly eight homes will be “taken” under eminent domain powers of the state.  I don’t know any of these homeowners who will be stripped of their homes, but I think you and I are complicit in the pain and suffering they will experience.

Eminent domain is an exercise of the police powers, the right and obligation of the state under Anglo-Saxon common law to protect the public health, safety, and general welfare.  Under the 10th Amendment to the U.S. Constitution these powers are reserved to the States.  The 5th Amendment to the Constitution requires that government pay just compensation when private property is taken for public use under the eminent domain powers.

Historically the courts have applied faulty economic thinking when determining what is just compensation.  This is where you and I, as part of the public which will be served by the taking of these homes, should feel some guilt.  We will benefit from safer traffic in the Brewer, Eddington, Holden region and the whole State of Maine will benefit from easier transit to and from the Maritimes.  Yet we will take these homes on the cheap.  We are unwilling to pay the higher taxes it takes to pay homeowners a fair compensation for their losses.

Since the Constitution requires just compensation for taking someone’s property for the public good, the obvious question is, how much do we pay someone when we take their homes?  The thinking from economics traditionally was that the market price of a home is its value, therefore payment of that market price would be just compensation.  This is a further example of the slavish reliance on markets to determine value in our culture, which I have written about before in this blog.

There are two reasons from modern economic theory to suggest that market price is not just compensation when we take a home.

First, is the assumption we make about markets that they are made up of willing buyers and willing sellers.  If this assumption is violated there has been a market failure and the resulting market prices are distorted.  By definition, in a takings case like the I 395 connector, the homeowners are not willing sellers.  If they had been then they would have sold their properties at market prices.  So fundamentally,  market price in this case is a flawed measure of value and is thus not a a basis for determining just compensation.

Second, advances in behavioral economics have shown that there is in modern humans a status quo bias which leads to something called loss aversion.  This phenomenon has been shown in multiple experiments.  People pay less to buy a good they do not own than they would accept to sell that same good if they already own it.  In economic jargon, you are willing to sell your home at a higher price than you would offer to buy the same home.  If you have been living in a home (the status quo) there are values to you alone that the market cannot reflect.  We should not neglect this fundamental understanding of human behavior when determining just compensation for a taking by the state.  Using the market price ignores this status quo effect.

So here is what we should expect from this process, because we are “the state” that is taking these properties to serve the public health, safety, and general welfare:

  • When people’s homes are to be taken, we should expect that it is for a compelling good that serves the public, not just some special interest.
  • We should place ourselves in the shoes of those whose homes are being taken and imagine how we would like to be treated if our homes were being taken (this is consistent with John Rawls’ of justice as fairness).
  • If homes are to be taken to serve the public interest, compensation should be paid that is more than market value. If we are going to ask a few individuals to assume the extra burden of vacating their homes to serve our collective interests, we should be willing to pay extra to reflect the extraordinary costs they are being asked to assume.  Merely paying market value is not just compensation and it is based on outdated economic theory.
  • And most importantly, we should be willing to pay higher taxes for safe and efficient infrastructure that is built without unjustly asking a small segment of society to bear undue costs because of the accident of their location. We should be willing to bear the costs of the improvements we get, including a truly just compensation for property that is taken.


Mark W. Anderson

About Mark W. Anderson

I am proud to be a Mainer, born in Caribou and schooled at Brewer High School, Bowdoin College, and the University of Maine. I am grateful for a 35 year career at UMaine, the last decade in the School of Economics.