Lighthouse: The Most Thrilling Case in Economics

Not many things are as exciting to economists as a famous debate about lighthouses in England. These have long served as a fine example of a public good that needs to be provided by the state. The idea of a trader selling light from the lighthouse sounds ridiculously.

Lighthouse: The Most Thrilling Case in Economics

Try to imagine such a trader sailing towards every vessel nearby, asking for a fee or threatening to turn the light off otherwise. It is difficult to make money off of the light and enterpreneurs usually do not get involved in something unprofitable.

Thus, a student of economics reads in virtually every textbook that there would be no lighthouses without the state. The most famous book by Paul Samuelson was no exception.

In  1974, however, Ronald Coase decided to stand up from his chair and find out how it truly was (though it probably only meant to switch chairs in a large London library).[1]  And he discovered an amazing thing – a solid portion of English lighthouses built before the beginning of the 19th century was privately owned. They were built, run and financed by private businessmen eager to make profits.

And the whole system had been quite effective before the nationalization in the first half of the 19th century. How come entepreneures had been able to achieve such a miracle? Simply: they tied financing of lighthouses to fees for staying in the ports.

The very purpose ot the lighthouse is to navigate a ship through treacherous waters off the shore, while finding its way to the port. Port and lighthouse services are therefore complementary. The former could hardly prevail without the latter.

At the same time, it is impossible to dodge the fee for staying at the port – unlike with the lighthouse. All it took was to tie these services and the problem was solved.

Textbooks could have been rewritten. But they were not. Paul Samuelson did not reflect on this new knowledge and used the example of lighthouses as public goods in every subsequential edition of his textbook.

And perhaps it was a good thing to do. In 1993 a new article appeared, looking closely into the issue of lighthouses in England.[2] And it came to unpleasing conclusions.

The private operators of lighthouses shared the same bed with the king and his offices. Yes, Coase was right that many lighthouses were built by the businessmen but the form it took would be described today as a public-private partnership.

An entepreneur first applied for a permission to build the lighthouse and the king granted him a monopoly in a particular area, and set fees, which were collected by the king’s tax collectors. Later on, another public agency got between the king and the businessman. It was the sailors guild called the Trinity House. The last nail in the Coase’s article coffin came a few years later with another article criticizing the very effectiveness of this system.

The fees were too high, complicated, and beneficial mainly for the Guild, the king, and the lighthouses operators.[3] They were much less beneficial for the customers and sailors.

At this point, the issue was freezed. But this year some new evidence emerged. And this evidence proves that the economists mentioned in the previous paragraph did not do their job very well. They were just like the man from that joke, the one who was looking for his keys underneath the streetlight during the night, even though he had lost them somewhere else – claiming that “at least there is light”.

Now two young scientists took a look beyond the lighthouses beams. They discovered an interesting fact. The lighthouse was not the only a tool to find a way near shores at night. There were also special floating lighthouses – ships with lights on their masts.

In their two new studies they tracked the story of English businessmen coming up with the idea in the early 18th century.[4] And, unlike their competitors with common lighthouses, these were based on completely voluntary principles without colluding with the government. We can even say that they were operating in spite of the king and his agencies existence.

How did they manage to do that? And how is it possible that neither Coase, nor the others knew about this?

In the first place, just like their predecessors, they tied offering a public good – a ship with light – with a private one, staying in the port. However, they lacked the monopoly-granting permission and tax collectors.

Instead of that they had promotion in taverns, café, and came up with a new idea – subscriptions. That’s a clever way how to exclude non-payers from using public goods – not providing it. The entepreneurs with lightships managed to convince the sailors that their invention can solve the issue of problematic coasts (not every place is fit to build a lighthouse). And they gave them the opportunity to subscribe their services together with a warning that there would be no ship with light if there were not enough payers.

The lightship was not only more flexible than the lighthouse but also significantly cheaper. This means that a lower rate of voluntary contributions was sufficient for the enterpreneurs to be profitable and, at the same time, they could charge smaller fees.

Moreover, they used a smart price discrimination – another tool to motivate (potential) freeriders not to hide their willingness to pay. Heavier, more profitable ships had to pay more than smaller, non-commercial ones.

The first lightship worked so well that entepreneurs immediately started funding campaigns to build others. Sadly, a problem emerged. And it was not a problem from a chapter about public goods but one from the section about rent-seeking and political failures.

The accused in this new case were the abovementioned sailors guild, Trinity House. Over the course of the 16th and 17th century, it was granted numerous addtional monopolies. It all began with the right to regulate and build seamarks , the right to issue licences for port pilots, and, later, the right to build buoys and lighthouses.

The Trinity House turned into a key agency protecting its lobbied monopoly on patents. Companies with lightships were very well aware of this. Prior to their operations, the agency had put an end to a number of initiatives trying to dodge its patents. For this reason they applied for an invention patent claiming that they aimed at bringing a new type of light on the market.

At first they escaped the spotlight of the Trinity House but only for a half of a year. Right after, the Trinity House launched a legal offensive in every direction. As a result, the king revoked the original patent and the lightships started to sail in illegal waters. And it continued to do so for two years.

Eventually, the companies surrendered and turned to an old and well-known strategy – if you can’t beat them, join them. They decided to pay the fee to the Trinity House and they were given monopoly on their operations. In addition a bunch of strictly set fees with officers responsible for their collection.

A historical analysis can never be 100% sure about its conclusions. But this last case tells us that purely private providing of public goods was very likely possible. All it took was not defining “the navigation market” too narrowly and look beyond classical lighthouses.

The question is: which new and innovative ways of tying would be found by the enterpreneurs if only the Trinity House had not monopolized providing of supplementary private services, such as piloting or aplying a load of bags on the ships’ bottoms to achieve better maneuvering ability?

Nevertheless, the history of ship navigation on the shores of England shows us that when explaining events we need to take a look not only on the market failures, but also on the state failures. These played a bigger role than the textbooks’ authors might expect.





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