Lighthouses are the textbook example of a “public good”: goods that are socially beneficial but that free markets under-provide.
The narrative goes that because everyone can see the light that they emanate but the producer of the light cannot see who consumes the light it is impossible to charge for the service. This leads to the free-rider problem: it is possible to benefit from the provision of lighthouses but avoid paying, leading to under provision. Therefore, the state must step in to build lighthouses. which is socially beneficial because they reduce the number of shipwrecks.
This is a nice theoretical story told by many introductory economics lecturers. But the historical experience shows that lighthouses are not in fact a public good.
Beginning with Ronald Coase, economists have objected to the lighthouse example. Coase pointed out that in pre-19th century Britain most lighthouses were provided privately. Other economists more recently pointed out that most lighthouses in Tokugawa Japan were privately constructed and operated. During the 18th century, many of the lighthouses of colonial America were privately built. These works suggested that, even if they were public goods, lighthouses could be privately provided.
However, these works never considered the possibility that lighthouses are not public goods. There are many historical examples of rudimentary lighthouses organised by shepherds or farmers during the off-season or by local taverns close to the seaside. These lighthouses, some of which are mentioned in sources such as Homer’s Iliad, have been lost to history because they were simple. They were unlike the towering edifices constructed by kings which have been left to weather the passage of time. History has only left us the state-constructed ones to observe physically. Mentions in old books are all that we have for the more rudimentary ones.
Yet, these more rudimentary lighthouses were economically relevant. Many sources concerned with the history of navigation point out that those who operated these lighthouses were using them to signal their offering of services as pilots to ship captains unfamiliar with local waters. For these local individuals who were familiar with the surrounding waters, these lighthouses operated as directional pilotage stations from which they could wait for clients rather than sail around in the hope of finding a client. The lighthouse was a complement to the services of pilots. More importantly, it made them more efficient as pilots because they could also use the lighthouse to better guide ships to port. In fact, even after lighthouses were fully nationalised by governments, they continued to frequently act as pilotage stations suggesting that even government-entities were aware of the possibility of bundling the two.
So why was there so little private provision of lighthouses in history? The reason is that pilots were one of the first trades in medieval Europe to organise and push for the formation of guilds that restricted access to the piloting trade. The first guilds faced important pushbacks from the providers of the rudimentary lighthouses who acted as pilots. However, they were gradually able to restrict entry in pilotage which, while increasing income for pilots, increased prices for shipowners (through a reduction in competition). In essence, the creation of a pilotage cartel reduced the supply of pilots which meant that the supply of lighthouses (which was jointly supplied) was also reduced. Had governments not conferred legal rights to restrict competition, there would have been more pilots and more lighthouses.
As such, the question is not why there were so few private lighthouses but why do we find so many. The best entrepreneurial option, the bundling of two services, recognised as the most efficient manner to provide lighthouse services, was legally restricted. This left entrepreneurs with “second best” options such as using subscriptions before provision (or lotteries which served the same end) or social ostracism of free riders. The fact that there was considerable private provision of lighthouses in this context of being constrained to use second-best solutions is an astounding one.
It is ahistorical to claim that lighthouse are an example of a public good that markets would fail to provide. The free market was perfectly capable of providing lighthouses and was only prevented by excessive government regulation.
Vincent Geloso is assistant professor of economics at King’s University College (London, Ontario)