How do you recommend allocating it, then?

Difficulty: without murdering millions of people to make it happen.

IIRC what some states do is that you can not buy or sell directly. Instead it goes seller -> state, state -> buyer. To a large extent the allocation is then still done by the market on the buyer's side, but the state has some leeway for overriding, e.g. highways, natural resources, environmental protection, affordable housing only, zoning.

Same as the society solved allocating humans. Instead of them being bought and sold on slave markets, nowadays we have companies leasing humans in exchange for a salary. You can do the same with land - lease it instead of giving asay infinite time ownership rights.

Which gov gets the money and why ?

Well, they seem to do OK in Hawaii. Not perfect by any stretch, but it isn't gulags and cold borcht.