Aim: To evaluate compensation principles employed by public utilities in Queensland. The hypothesis to be examined is whether land acquisition and compensation is suited for the purpose.
Scope: The study applies the theories of distribution and compensation of economics and law, examines alternative approaches to the measurement of externalities and presents some limited empirical evidence on the impact of the South East Freeway (SEF), Brisbane upon residential house values.
The evaluation of compensation principles employed by public utilities in Queensland found that: (i) current legislation is not suited for the purpose; (ii) current legislation is a source of economic redistribution between residential property owners at the same point of time and over time given the existence of public work; and (iii) macroeconomic compensation principles are inappropriate to the analysis of the efficiency and distributional effects of public work, at a micro (project) level.
The economic model of property rights and externalities is found to offer a more logical, consistent and balanced principle of compensation and taxation of the windfall effects of public works than the corresponding legal model.
This study of the impact of the SEF on residential property values suggests that there was a significant effect on property values beyond the properties partially acquired for the SEF The construction phase would appear to have increased property values compared to operation phase values at inflation adjusted prices, all other things being equal. Both Study 1 and 2 yielded results which indicate that while individual attributes of freeway proximity and aspect were statistically insignificant, the freeway attributes were jointly significant in their contribution to the explanation of residential housing prices.
More generally, it is concluded that the utility of welfare economics as a tool of public decision making will ultimately be judged by its ability to address the issue of the distributional impact of public policy decisions and public projects. Compensation principles at a macro level, such as the Kaldor-Hicks criterion, the Scitovsky (reversal) criterion and Little's third criterion, have not been developed nor are suited for the analysis of the efficiency and distributional effects of public works at a micro level.
A microeconomic compensation rule is proposed that would satisfy the widely accepted macroeconomic compensation criteria for an economic welfare gain, the Kaldor-Hicks criterion, the Scitovsky (reversal) criterion and Little's third criterion. The proposed microeconomic (project) level compensation rule is that individual property owners be compensated for realised losses in property values and taxed for realised gains in property arising from the external effects of public work projects (at the time of sale of their properties).
The proposed microeconomic (project) compensation rule would provide an efficient and equitable criterion for a gain or loss in economic welfare, at a project level It would assist the estimation of unrealised windfall effects. And given the need to consider the external effects of major public works projects, the rule would help to determine whether there are mutual gains from trade between user and non-user groups associated with individual projects.