Efficiency and fairness: Compensation for takings

Fairness as well as efficiency is an important aspect of compensation if land is condemned for public use. Much of the economics literature focuses on the efficiency aspect of compensation while equity considerations are given far smaller space. For a limited set of public projects, those for which the entire benefit is captured in land values, compensation at the market value of non-taken land is shown to induce efficient choices by both the bureau that makes the taking choice and the landowners whose property is affected by those choices. The compensation rule is self-financing if the bureau's expenditures are financed entirely by an ad valorem property tax. The generality of the conclusion is limited by the motives of the bureau and the order in which the decisions are made.