Lighthouses have been illuminating the field of economics at least for two centuries. Ronald Coase (1974) reviewed the references of classical economists such as John Stuart Mill, Henry Sidgwick, and Alfred Pigou contributing to the definition of what were later called "public goods," in particular with reference to the "non-excludability" aspect; and Paul Samuelson (1964) introduced "nonrivalry in consumption," though Coase's aim was to bring up a story that "may serve to enlarge our vision of the range of alternative institutional arrangements available" (Coase 1974, p. 362).
According to the first principle, nonexcludability, "since it is impossible that the ships at sea which are benefited by a lighthouse, should be made to pay a toll on the occasion of its use, no one would build lighthouses from motives of personal interest, unless indemnified and rewarded from a compulsory levy made by the state" (Mill 1848, book V, chapter XI, V. 11.57). This nonexcludability is the free-rider problem. The second, nonrivalry in consumption, states that even if it were possible to exclude free riders, it would not be efficient to do so since the marginal cost of an additional user would be zero. This second principle basically assumes noncongestion and unlimited supply to all potential users, at least within a comfortable range.
The institutional arrangement for the supply of these services, though, seemed to be different for Coase and Mill on one side, Samuelson on the other. Public goods must provide for two different kind of solutions: financing and provision. It appears that Samuelson had government financing and provision in mind since he denies the possibility of private provision because "a businessman could not build it for a profit" and "this is certainly the kind of activity that governments would naturally undertake" (quoted in Coase 1974, p. 358). Mill seems to have considered government financing through light duties and private provision.
No wonder Mill thought so; that private entrepreneurs or other organizations built and managed some lighthouses, and financing came from light duties imposed by government, was more or less the institutional arrangement throughout Europe since lighthouses started to be built in the sixteenth century (Lindberg 2009).
Trinity House, Private or ...?
Coase's analytical narrative was based on the history of the British system between the sixteenth and nineteenth centuries and the roles played by the Lord High Admiral, Trinity House, and private entrepreneurs. (1) Trinity House is the General Lighthouse Authority (GLA) for England, Wales, and the Channel Islands, providing aids to navigation from lighthouses to buoys to satellite navigation technology. It also inspects local aids provided by port authorities. Its expenses are covered by the General Lighthouse Fund, with revenues coming from light dues paid by commercial shipping. It still keeps its original charity activity, though separately from the GLA activities. The light dues are set by the Department of Transport and are payable per net ton on commercial shipping only for the first six visits to a UK port per year.
Coase describes, and Trinity House confirms, that many lighthouses were privately built, operated, and maintained through licenses obtained from Trinity House or the Crown itself. (2) The main goal of Coase's article is to debunk the generally accepted idea that government financing and provision of public goods is the only viable alternative, with lighthouses as the usual example. He does not rule out other possibilities, arguing that the account of the British system reveals just some of them (Coase 1974, p. 375). In a subsequent paragraph, he describes the system as "private," although clearly referring to provision and not to financing. (3) Coase's mention that lighthouses were "financed" by private individuals refers to the original capital investment to build them, not to their operation and maintenance that we know came from the light dues. Nevertheless, his statement sparked an intense debate over whether this institutional arrangement could be called "private."
The first to throw a stone was van Zandt (1993), arguing that private enterprise "hardly captures the reality of the provision of lighthouse services" since "the government played a substantially greater role in the provision of lighthouse services than Coase's term 'private' suggests" (p. 48). Later on, both Bertrand (2006) and Barnett and Block (2007) raised the same concern, although with different perspectives: Bertrand shows there were charitable organizations providing and financing lighthouses, though she does not take them to be "private enterprises" since they are not profit motivated, while Barnett and Block argue that the charitable sector of the economy is private because it is the result of voluntary actions, like those of profit-maximizing firms. Barnett and Block, based on their definition of "private" as "voluntary," define the British case as presented by Coase as "governmental, not market-based supply" (Block and Barnett 2009). Lindberg (2009, p. 23) and Block (2011) also consider the case presented by Coase as "governmental," or tax-based.
Financing through government-imposed light dues shows a much needed government role in solving market-failure problems for some researchers, while it is just evidence of governmental taxation for others, though complete private provision and financing could be imagined.
Van Zandt (1993) develops a different classification, following the idea of a "continuum" of institutional arrangements between purely private voluntary and purely government compulsory. Both classifications are not incompatible; there may be different alternatives that fall into one or the other camp. This is how van Zandt (1993, p. 56) defines them:
Private provision with no government enforcement of property and contracts rights
Private provision with government enforcement of property and contract rights only
Private provision with government fixing rates, granting monopolies and enforcing collection of specified user levies
Government provision from collection of specified user levies
Government provision from general revenues
Samuelson uses the lighthouse example as one of public goods that fall within category 5; Coase describes a British system along option 3. Most countries have systems falling under category 3 or 4; examples include those under...
Buoys and beacons in economics.
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