INTRODUCTION

The Fifth Amendment to the U.S. Constitution proscribes government “takings” of private property without just compensation. Beyond constitutional requirements for compensation is a legislative debate on how far the government should go to pay landowners for costs of environmental protections. Recent legislative proposals, for example, would require compensation for diminution in private property values that occurs when the government acts to protect endangered species (under the Endangered Species Act – ESA) or wetlands (under the Clean Water Act and the Farm Bill).

For economists, two sets of issues arise in the takings context – corresponding with the legislative debate on compensation on the one hand, and on the other, the constitutional debate on appropriate limits to the takings clause. In the legislative arena, economic logic can shed light on how compensation affects private incentives to use property – and in view of these effects, when and how much compensation should be paid in order to ensure an efficient private use of land. On the constitutional front, in contrast, the question is how to provide the government with incentives to regulate and take land efficiently, using constitutional (compensation) restraints that curb potential government misbehavior.

This chapter is concerned with both of these issues when, contrary to prior economic modeling, the economic setting is one with multiple parcels of private land that can differ in their levels of private development and that afford the government a choice of how much land to “take” for public uses such as habitat or wetlands preservation.