From Private to Public Provision of Public Goods: English Lighthouses Between the Seventeenth and Nineteenth Centuries

Before the advent of modern navigational systems, such as radar and global positioning systems (GPS), the presence of a lighted landmark was vitally important because of the need for such services in bad weather conditions and in the dark, when the dangers for shippers and seamen at sea were the greatest. Such information also needed to be reliable. Human error and neglect that resulted in the malfunctioning of such an expected landmark could lead to disaster. Furthermore, lighthouses were expensive constructions, often built with considerable risk of loss of capital and lives. Lights could burn out and reflective mirrors become dirty, leaving the ships without guidance in the dark. In addition to such problems, false lights lit by wreckers could sometimes lead ships astray. Administrative structures were therefore needed to ensure that the lights were sufficient in terms of quantity and quality.

The problem with lighthouses, and the reason why they have attracted so much attention from highly respected economists, is the potential issue associated with financing such a service, for which the exclusion of nonusers is impossible. The light emitted from a lighthouse warns all ships sailing on the sea, regardless of whether they pay for its service or not. Because ships can take advantage of the information sent out by the lighthouse without coming into contact with the lighthouse operator, much less paying the operator for the service, private entrepreneurs are discouraged from building and maintaining lighthouses. Therefore, the lighthouse service fulfills the requirements of a public good: nonexclusive ability and nonrival consumption. Should a society wish to build lighthouses, conventional economic wisdom proclaimed that only the government could provide such goods in sufficient amounts. J. S. Mill explained the problem with exclusion as “[i]t is impossible that the ships at sea which are benefited by a lighthouse should be made to pay toll on the occasion of its use.”¹ For a lighthouse owner, the problem, as Paul Samuelson noted, is that “lighthouse keepers cannot reach out to collect fees from shippers.”² Therefore, “a businessman could not build it for profit, since he cannot claim a price from each user.”³ Samuelson concluded that the lighthouse was an example of government provision of public goods “without which community life would be unthinkable and which by nature cannot be appropriately left to private enterprise.”⁴ Ronald Coase’s (1974) paper “The Lighthouse in Economics,” which initiated the interest in the history of public lighthouse administration, is widely considered to be groundbreaking because it illustrates the feasibility of private enterprise producing public goods on a profit-making basis.⁵ Such a conclusion contradicted the conventional economic wisdom of the time, which claimed that the lighthouse was a crucial example of how market failures supposedly call for government action. According to mainstream economic theory, the proper functioning of lighthouses is regarded as a public good because of difficulties associated with obtaining payment for its use.⁶ Coase, however, set out to demonstrate that, for an extensive period of human history, lighthouse services were provided by private enterprises rather than by governments. He came to the following conclusion: “Contrary to the belief of many economists, a lighthouse service can be provided by private enterprise. … The lighthouses were built, operated, financed and owned by private individuals, who could sell the lighthouse or dispose it by bequest.”⁷ Lighthouses have thus become something of an ideological battlefield for economists and historians, either for illustrating the feasibility of profitable private provision for much-needed public services, or as an example to demonstrate the necessity of regulatory policies by the state. In this article, I investigate the evolution of lighthouse services in England, from private provision to becoming part of the public sector itself, between the seventeenth and nineteenth centuries, using a unified theory of contractual relations between the government and lighthouse owners. This public-private partnership approach is used to illustrate the economic and contractual logic that underpins the public and private provision of public goods services associated with lighthouses.

The Modern Debate on the Private Lighthouses...