‘Takings’ bill bad economics, bad policy

Posted Feb. 17, 2012, at 4:35 p.m.

The Legislature is considering a bill, LD 1810, that would establish a right for property owners to claim monetary compensation from the state if a regulation resulted in a decrease in the market value of the property of 50 percent or more. In my judgment the bill represents bad economics and bad public policy.

One of the key concepts in economics is that of negative externalities. A negative externality occurs when the action of one party causes harm to one or more other parties and the responsible party has no obligation to compensate those who are harmed.

There is a long literature on the appropriate ways to deal with negative externalities. And regulations barring or restricting the activity causing the harm or requiring that the party causing the harm compensate those who are harmed are among the options discussed in this literature.

LD 1810 would turn this whole concept on its head by requiring that those who would potentially cause the harm be compensated for any regulation that would prevent them from causing harm.

Another way to look at this issue involves recognizing that it is implicitly based on a premise that I think most people would reject if it were made explicit. The implicit premise is that landowners have a fundamental right to use their land in ways that cause harm to others and that they should be compensated whenever government regulations interfere with that right.

An assertion that landowners have such unlimited right offends my sense of fairness and has no basis in the U.S. or Maine constitutions.

A logical corollary of the implicit premise behind LD 1810 is that abutting landowners do not have a right to recover damages when one landowner’s actions cause them harm. Again, most people would reject this premise. And it runs counter to a long tradition in American common law.

In one section, this bill backs away from the assertion of unlimited landowner rights by exempting regulations dealing with nuisances and public health and safety. But these exemptions do not go nearly far enough. In an increasingly interdependent world, there are many ways in which a landowner’s activities can inflict harm on others, either directly or indirectly. In my view, these activities are legitimate targets for government regulations and landowners should not have a right to expect compensation for not inflicting this harm.

Examples of regulations that would prevent harm to others but would not be exempted by this include:

• Limitations on building height that prevent landowners from obstructing the views of abutters or limit their access to sunlight and solar power;

• Regulations governing septic system installations that serve to protect groundwater and surface water quality for others;

• Minimum lot size requirements that prevent high-density development that can threaten the quantity and quality of groundwater supplies;

• Regulations preventing the destruction or alteration of wetlands so as to protect groundwater and prevent the loss of essential habitat for waterfowl and other species of importance to people.

I have no doubt that there are instances in which regulations have gone too far in the sense that the harms to others that are prevented are small relative to the costs imposed on landowners or where there is no clear demonstration of harm to others. But the requirement that landowners be compensated for a broad class of regulations is not the proper remedy in such cases.

Rather, the answer to such cases of “over-regulation” is to examine each regulation and to reject those that do not deal with a clearly identifiable harm to others or that impose costs on the landowners that are out of proportion to the harms prevented. And landowners who believe that a particular regulation affecting them is not justified in terms of the harms that it prevents have a variety of ways to seek changes in the regulation or to request a variance.

A. Myrick Freeman III, Ph.D. is the William D. Shipman Professor of Economics Emeritus at Bowdoin College.


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