Economics
Eminent Domain and Market Forces
Markets depend on voluntary transactions to allocate resources efficiently. Individuals are willing to buy goods as long as they get more value from the goods than the price they pay for them. Similarly, individuals are willing to sell goods as long as the price they receive is higher than the benefit they would get from keeping the goods. Thus, voluntary transactions benefit buyer and seller because they are both better off after the exchange.

Economists call the difference between the price a buyer was willing to pay for a good and the lower price she actually pays her consumer surplus. The difference between the price at which a seller was willing to sell a good and the higher price at which she actually sold it is her producer surplus. Consumer surplus and producer surplus are measures of how much better off market transactions make people. As long as individuals make transactions voluntarily, they enjoy a producer or consumer surplus.

Government's eminent domain power, however, distorts market forces by allowing involuntary transfers of property for "public benefit." If government forces a private property owner to sell her property, we know she is worse off as a result. (After all, if the transaction made her better off, she would have voluntarily agreed to sell.) Hence, her producer surplus is negative. If the taking is to yield a net public benefit, it must produce public benefits large enough to offset her negative producer surplus.

But when government uses its eminent domain power to transfer private property from one individual to another, it distorts the market in another way, too. When a business receives property to use for economic development from the government for less than it would have had to pay the owner, it is effectively receiving a subsidy from the government. Subsidies are government payments to producers. When government subsidizes some firms' land purchases, those firms can produce their products at a lower cost and earn higher economic profits than firms that did not receive the subsidy.

Economics can't tell government whether it should exercise its eminent domain power to take private property from one individual and give it to another. They can, however, tell it about the costs of distorting market forces.

Source: David C. Colander, Microeconomics, 4th ed. (McGraw-Hill, 2001).