"Eminent Domain" or "Police Power"?

I've dug up an old case on the issue of property law and decided to digest it.

In 1922 a landmark case helped form the justice department's opinions about eminent domain. Oliver Wendell Holmes, who delivered the opinion of the court, said that in certain situations, according the contracts of law, one must yield to the police power of the state. "Police power" in the sense that Holmes is using it refers to the "regulatory taking" of property through contracts that are facilitated by the government. This is different from eminent domain since that kind of regulatory taking requires compensation by the government. Police power does not. Government can proclaim contracts between private parties invalid if they are damaging to the public interest.

The case in point, Mahon v. Pennsylvania Coal Company, appears to be justified in its reasoning. Mahon had purchased surface rights to a parcel of land, which he inhabited. The Coal Company later wished to mine for coal under Mahon's property, and later, under Pennsylvania law (i.e. the Kohler Act) mining that could potentially cause damage to human habitation was forbidden. Mahon plead to the court to disallow the coal company from mining under his property, and the Supreme Court reversed earlier decisions and upheld the principle of regulatory taking.

Facilitating property rights and disputes is perhaps one of the few good uses of government. In Mahon v. Pennsylvania Coal Company, the court merely facilitated a misunderstanding between contracting parties as to what limitations a "surface right" had implied within it. Significant diminution of property value or damage to human habitation, Holmes said, is a right that surface owners have regardless of the explicit terms of contracts. With the development of new technologies and new sources of property use, which require constant revision of contract law, agreements which did not contemplate future uses need to be arbitrated by a court system in the event of a dispute.

The court refers to this sort of "regulatory taking" as police power, and yet it is later used to justify eminent domain, which is the government's active taking of property in order to fund public developments. This I don't understand. Since states have the power to arbitrate property disputes, it does not follow that they have the power to arbitrate property usage altogether. It puts states on a slippery slope towards complete control of land properties. In forming the opinion of the court, it is difficult to see how the justices could have reasoned that, since there is one legitimate use of government power, that there are further uses of that power which extend beyond mere arbitration and into the realm of annexation.