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...public goods. closer examination, however, it turns out to be inconsistent, both with economic theory, and, as evidenced by the case law, with the way courts have decided public use cases. The goal of this section is therefore to develop the proper economic interpretation of public use. The discussion, which is based on the classic examination of this question by Merrill (1986), involves distinguishing between the free rider problem associated with public goods, and the holdout problem associated with land assembly (Cohen, 1991).
3.1 Public Goods and the Free Rider Problem
Public goods have the characteristic that once they are provided, their benefits are available to all consumers, including those who have not contributed to the cost of provision. (1) Because of this non-excludability, or free-rider, problem, providers expect to have difficulty in exacting payment from consumers, which leads to underprovision of such goods by the private market. Efficiency therefore dictates that the government should either subsidize public goods, or take over their provision altogether, and then use its tax powers to coerce payment from consumers. In this sense, government provision and financing of public goods requires kind of "forced purchase" by consumers.
Although the free-rider problem provides a justification for government provision of public goods, it does not by itself justify the acquisition of land by eminent domain. For this, we turn to a second economic problem, namely, land assembly and the holdout problem.
3.2 Land Assembly and the Holdout Problem
Some large-scale projects require the assembly of several contiguous parcels of land whose ownership is dispersed. Examples include public projects like highways and parks, but also private projects like railroads and commercial developments. The problem facing providers in these cases is that, once the assembly becomes public knowledge, each landowner realizes that he or she can impose substantial costs on the developer by refusing to sell. Imagine, for example, that a road builder has decided on the optimal path for a highway and has assembled several parcels along the route. The refusal of any one owner to sell would greatly increase the cost of completing the project, if not preventing it from being completed altogether (the proverbial "highway to nowhere"). This knowledge confers significant monopoly power on landowners,...
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