The Mythology of Holdout as a Justification for Eminent Domain and Public Provision of Roads

By Benson, Bruce L. | Independent Review, Fall 2005 | Go to article overview

The Mythology of Holdout as a Justification for Eminent Domain and Public Provision of Roads


Benson, Bruce L., Independent Review


One of the alleged justifications for government provision of roads is that the power of eminent domain is necessary in order to overcome holdout problems and obtain right-of-way properties (Goldstein 1987). (1) After all, this argument continues, only the state has such power, so the private sector would be unable to supply the efficient amount of roads. (2) In this article, I examine this market-failure justification for public roads from three different perspectives and demonstrate that it is not valid. (3) The first and perhaps the most obvious point regarding the eminent-domain justification for government provision of roads is that even if this power is required to obtain a fight-of-way, the government does not have to site, construct, finance, or operate (that is, maintain and police) the road. I briefly summarize some of substantial historical and modern evidence that members of the private sector are able and, indeed, willing to site, construct, finance, and operate roads if they are allowed to do so. The implication is that even if eminent domain is required in order to obtain a right-of-way, that right-of-way can be turned over to the private sector, which can then build and operate the road.

I turn next to a direct examination of the alleged market-imperfection justification for the use of eminent domain to obtain right-of-way properties: transactions costs owing to the "holdout" problem that is assumed to prevent private-sector acquisitions of multiple contiguous land parcels for a roadway (Fischel 1995, 68-70). I demonstrate that the holdout problem is not nearly as severe as it is assumed to be when private entities make the purchase. Although government entities may face a significant holdout problem, the magnitude of any market failure that might occur with a private road system is much less significant than this holdout justification for public roads assumes. Finally, I explain that the use of eminent domain is undesirable for a number of government-failure reasons. Therefore, even if a potential market failure limits private road providers' ability to obtain right-of-way properties, the "need" for eminent domain does not justify public provision of roads. Eminent domain is not even justified for the private provision of roads because the probability of market failure is low in the absence of this power and because the substantial degree of government failure that accompanies the power appears to overwhelm any benefit from overcoming the holdout problem.

Must the State Own, Build, or Operate Roads?

Putting aside for a moment the issue of eminent domain, let us consider whether the state must own, build, or operate roads. (4) Numerous examples of privately provided roads from highways to local roads in the United States and other countries, both at the present time and in the past, indicate that it evidently need not. In addition to the chapters in the forthcoming Roth volume on Sweden's extensive private road system, recent privately built and run highways in the United States, the many privately built and maintained local roads, the history of privately built roads in Great Britain and in the United States, and the privatization of road management, Beito (2002) and Newman (1980) discuss the history and recent past of privately provided roads in St. Louis. Shearing and Stenning (1987) detail the massive role of private security and the resulting order in Disney World, a huge complex with hundreds of miles of private roads and highways (also see Foldvary 1994). Furthermore, many developing countries are franchising roads to private firms that construct the roads and then operate them, charging tolls to earn the costs of construction and operation, and to cover franchising fees paid to the government (Pereyra 2002). Indeed, providing such roads is so attractive, in part because of their impact on real-estate values, that it is becoming increasingly common for governments to auction franchises (Engel, Fischer, and Galetovic 2002). …

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