Kelo & Economic Development

Reposted, fishing for comments:

The recent Supreme Court opinion in Kelo reminds me that there are a host of local government policies aimed at promoting local economic development. Many local governments seek to promote economic development by means that include subsidies and the use of eminent domain for "redevelopment" of specific areas within communities (the specific concern in Kelo). From the economic point of view, policies by local government to promote economic development make sense if there is a source of market failure. By implication, we can also say that if there is no source of market failure, then we have to expect that government policies that intervene in individual choices (even in the name of economic development) will lead to less economic development rather than more. The very presumption of the Kelo opinion that government's use of eminent domain power would serve a public purpose could be questioned if we do not believe there is a source of market failure to remedy.

Do you think there are any sources of market failure that are related to the development of local economies, and that therefore, would provide an economic justification for local governments pursuing the promotion of economic development?