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Liberty in Context
Part of the town's justification is that shrinking the city also reduces the cost of providing public services (road maintenance, garbage, sewage, police and fire protection of abandoned buildings, etc.).
I can see a scenario where the municipality could offer the property owner a "choice" of either a buyout or higher fees/taxes.
There now is a whole sub-genre of architecture and city planning working on concepts of "rueckbauen" (~de-building) not just living and commercial space, but also infrastructure such as roads etc.