The eminent dilemma

(Related posts by Rohit, Sabnis, Amit Varma)

Singur is latest in series of controversies concerned with government takeover of land for industrial development. The principle behind this action is knows as eminent domain.

As mentioned in the posts linked above, the case against this principle because it violates right to property. This is a valid argument. In theory, free markets work best when players act according to their own judgement, supposing any such judgement follow rational self interest and bounded by required legal enforcement. Any intervention will cause distortions, which more often than not will have sub optimal results. Therefore theoretically eminent domain should be eschewed.

I do not however totally agree with the premise of the above posts (that restoration of right of property is the "complete" solution*), because in my opinion this is where reality deviates from theory.

As this article indicates, the first problem is co ordination between a large number of sellers. In India the land holding is in general small, and this means that any private player who wishes to buy a considerable tract of land has to deal with a large number of sellers simultaneously. Thus co-ordinating the sale is a critical issue for completion of transaction.

The second problem is that since for any transaction to be completed requires a large number of small transactions, in effect the over all transaction is held hostage to successful completion of every transactions. This implies that theoretically** any seller acting purely on self interest can demand very steep price, this probability increases if non rational factors (such as emotional attachment) are also at play. Coupled with lack of co-ordination, this situation makes completion of transaction very difficult.

I can think of a tentative solution. While a person may have exclusive right to his property, he doesn't have any corresponding right on utilities, such as electricity, road.

In general organization and improvement of farm land is heavily dependant on extensive use of utilities.

Hence control of utilities can be transferred to community, and its use its decided on basis on simple majority. This will act as a deterrent again problem described in previous paragraph, while maintaining the right of property.

* I paraphrase but that was what I gleaned.

** Theoretically is the key word, I don't have enough data to test the hypothesis.

PS My earlier post

PPS I am engineer, not economist, so if you think that what I have written is rubbish, please don't hate me. Just assume this is "love neighbourhood ignoramus" week.