Organizations and Markets

Was Coase Right About the Lighthouse?

24 October 2006 at 10:35 am Peter G. Klein 6 comments

| Peter Klein |

A few years ago I attended a Liberty Fund conference on the private provision of public goods. In preparation for the conference I re-read Coase’s classic 1974 article, “The Lighthouse in Economics,” for the first time since my graduate-school days. I recall being surprised how much weaker the argument was than the way I had remembered it. Far from showing that British lighthouses were “private” — as the paper is widely thought to have demonstrated — Coase’s analysis shows simply that public goods can be financed through user fees, rather than general tax revenue. But, in the case of the British lighthouses, the user fees were compulsory, government-enforced levies on ship owners, not voluntary market transactions. The British lighthouses were government-granted monopolies, more like the East India Company or a local public utility than “free-enterprise” institutions.

Until now the only detailed re-investigation of Coase’s historical analysis was David van Zandt’s “The Lessons of the Lighthouse: ‘Government’ or ‘Private’ Provision of Goods” (Journal of Legal Studies, January 1993). Van Zandt argues that Coase’s concepts of “government” and “private” are too coarse, offering instead a finer set of distinctions based on the exact method of finance, the specific role of government enforcement, and so on. (An unpublished paper by William Barnett and Walter Block maintains that van Zandt didn’t quite get it right.)

Now comes a new paper by Elodie Bertrand, “The Coasean Analysis of Lighthouse Financing: Myths and Realities” (Cambridge Journal of Economics, May 2006). offering the most detailed analysis to date. As Bertrand points out, the British lighthouses

belonging to private individuals were supervised by the Lord High Admiral and then by Trinity House. The “owners” were compelled to replace them in case of natural destruction, and to pay a fine if they destroyed them. Regarding the lighthouses built by private individuals, they needed the authorisation from the public authority, issued by the King, Parliament or Trinity House. Light dues for private “owners” and for Trinity House were collected in the same way, and by the same individuals — Trinity House employees assisted by Customs officers or these officers themselves. Although Trinity House was a private organisation, it was supervised by government, and the original Charter of its foundation (1513) put it in charge of shipping activity.

Bertrand goes on to suggest that a stronger role for government would have improved the efficiency of lighthouse provision. Regardless of whether one accepts that conclusion, however, the historical analysis is worth reading.

Given Coase’s insistence that economists get their facts right, how ironic that he himself should fall victim to the same mistake!

Entry filed under: - Klein -, Business/Economic History, Classical Liberalism, Institutions, Myths and Realities, Recommended Reading.