The lighthouse in the argument

For more than a century, students opening an economics textbook have met the same homely illustration of a problem that markets are said to be unable to solve. A lighthouse, the argument runs, casts its beam across the sea for the benefit of every passing ship; no vessel can be prevented from seeing it, and one ship’s use of the light in no way diminishes another’s. A private owner, unable to charge the ships that benefit, could never recover the cost of building and tending such a structure. The conclusion seemed inescapable: if lighthouses are to exist at all, the state must provide them. Few examples in the discipline have been repeated so often or, as it later emerged, examined so little.

The lighthouse owed its prominence to the theory of public goods. Economists distinguish ordinary commodities, which can be withheld from anyone unwilling to pay, from goods that are both non-excludable, impossible to deny to those who have not paid, and non-rival, meaning that one person’s consumption leaves no less for everyone else. National defence is the standard case; so, it was argued, is the light of a coastal beacon. Where such goods are concerned, each individual has an incentive to enjoy the benefit while leaving others to bear the cost, the so-called free-rider problem. A succession of distinguished economists, from John Stuart Mill in the nineteenth century to Paul Samuelson in his mid-twentieth-century textbook, drew the same moral: provision must fall to government, since no profit-seeking individual would supply a service from which payment could not be extracted.

In 1974 this comfortable consensus was disturbed by the economist Ronald Coase, who made a deceptively simple observation: the scholars who invoked the lighthouse had, almost without exception, neglected to ask how lighthouses had actually been provided. Turning to the history of England and Wales between the seventeenth and nineteenth centuries, Coase found that the supposedly impossible had in fact been commonplace. For long stretches of that period, lighthouses were built and operated not by the state but by private individuals, who ran them for profit.

The mechanism that made this possible was the collection of charges known as light dues. An individual wishing to erect a lighthouse would petition the Crown for a patent, occasionally confirmed by an Act of Parliament, granting the right to build the light and to levy dues on the ships that benefited from it. The crucial detail, overlooked by the armchair theorists, was where the money was gathered. Rather than attempting to charge vessels at sea, where exclusion truly would have been impossible, the dues were collected in port by customs officers, calculated according to a ship’s tonnage and the route it had sailed. A ship could decline to pay only by declining to make port, and so the free-rider problem, fatal in theory, was quietly solved in practice. Supervision of the system rested with Trinity House, a body descended from a medieval seamen’s guild.

The private arrangement did not endure. Across the nineteenth century the privately held lights were bought up and brought under the control of Trinity House, some of them changing hands for sums that would today amount to many millions. Yet Coase argued that this transfer should not be read as the failure of private provision. The pressure for it, he suggested, came not from any inability of the lights to pay their way but from shipping interests, who preferred that the cost of the service be shifted from the shipowners who used it onto taxpayers at large.

Coase’s account was, in time, subjected to the same scrutiny he had applied to his predecessors. Later scholars accepted his central historical finding, that private individuals had indeed operated lighthouses, but questioned what it proved. The right to collect light dues, they pointed out, was no ordinary commercial bargain: it was a monopoly privilege granted by the Crown, and the dues themselves were compulsory, gathered by government officers rather than freely negotiated. Trinity House, though nominally a private corporation, was supervised by the state and held the sole authority to license new lights. On this reading, the “private” lighthouses had depended at every turn on a scaffolding of government-granted and government- enforced rights, and to call them a triumph of the free market was to claim more than the evidence would bear.

What began as a tidy illustration thus ended as a tangle. The lasting interest of the episode lies less in lighthouses than in the caution it carries: that a convenient example, endlessly repeated, can harden into a fact that no one troubles to check, and that the line between public and private provision is seldom as sharp as a textbook requires it to be. The lighthouse, once the unanswerable case for government action, is today cited with equal confidence by those who argue the very opposite, which is perhaps the surest sign that the real lesson lies somewhere else entirely.