Do Holdout Problems Justify Compulsory Right-of-Way Purchase and Public Provision of Roads? *

One of the alleged “justifications” for government provision of highways and roads is that the power of compulsory purchase 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 and highways. ² This market-failure justification for public roads is examined from three different perspectives below to demonstrate that it is not valid. ³ The first, and perhaps most obvious, point regarding the compulsory-purchase justification for government provision of roads is that even if this power is required to obtain a right-of-way, the road itself does not have to be sited, constructed, financed, or operated (e.g., maintained, policed) by the government. Section II briefly summarizes some substantial historical and modern evidence demonstrating that members of the private sector are able, and indeed, quite willing, to site, construct, finance, and operate roads if they are allowed to. The implication is that even if compulsory purchase 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. Section III turns to a direct examination of the alleged market-imperfection justification for the use of compulsory purchase 44to obtain right-of-way properties: transactions costs due to the “holdout” problems that are assumed to prevent private sector acquisitions of multiple contiguous land parcels for a roadway (Fischel 1995, pp. 68–70). It is demonstrated that the holdout problem is not nearly as severe as it is assumed to be when private entities are making the purchase. Therefore, while government entities may face significant holdout problems, the magnitude of any market failure that might actually exist with a privatized road system is much less significant than this holdout justification for public roads assumes. Furthermore, the use of compulsory purchase actually is undesirable for a number of government-failure reasons, as explained in Section IV. Therefore, even if there is a potential market-failure limiting the ability of private road providers to obtain right-of-way properties, Section V concludes, not only that: (1) the “need” for compulsory purchase does not justify public provision of roads (as demonstrated in Section II), but that compulsory purchase through government itself is not even justified for the private provision of roads, because (2) the probability of market failure is low in the absence of this power (as illustrated in Section III), and because (3) there is a substantial degree of government failure accompanying the power that appears to more than offset any benefit from overcoming the holdout problem (described in Section IV).