Lighthouses have been a canonical example for economists--but what that example is intended to illustrate has shifted dramatically over time.
The lighthouse example was original used by economists as an example of a situation where government provision of a good was necessary, because lighthouses could not easily impose charges on ships passing at sea, and so a private firm could not earn a profit by investing to build a lighthouse. This example dates back at least to John Stuart Mill's 1848 Principles of Political Economy. In Book V, Chapter XI, "Of the Grounds and Limits of the Laisser-faire or Non-Interference Principle," Mill writes:
[I]t is a proper office of government to build and maintain lighthouses, establish buoys, &c. for the security of navigation: for 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.
The lighthouse example was then cited by a succession of prominent authors as an example where government action was needed because markets could not function, including repeated mentions in Paul Samuelson's classic introductory textbook that defined economics pedagogy for most of the second half of the 20th century (and arguably since then, too).
But Ronald Coase reversed this argument in his classic essay "The Lighthouse in Economics" (Journal of Law and Economics, October 1974, 17:2, pp. 357-376). He discussed the use of the lighthouse example by Mill, Samuelson, and others. But Coase then pointed out that however much these earlier arguments appealed to intuition, as a matter of actual historical fact, many British lighthouses in the 17th and 18th centuries were in fact built and run by private companies.
The common process was that private investors would petition the Crown for a "patent" to build a lighthouse in a certain location. The petition was signed by local ship-builders and ship-owners, who pledged that they were willing to help pay for the lighthouse. "The King presumably used these grants of patents on occasion as a means of rewarding those who had served him. Later, the right to operate a lighthouse and to levy tolls was granted to individuals by Acts of Parliament." Ships that arrived in nearby ports where then charged tolls. In other cases, Trinity House--an institution dating back to the medieval guilds which had authority to regulate pilotage and shipping--would apply for a lighthouse "patent," and then lease the patent to a private individual who would provide the money for building the lighthouse and receive the funds.
All markets rely on enforcing contracts and property rights. Coase argued that in the case of British lighthouses of this earlier time period:
The role of the government was limited to the establishment and enforcement of property rights in the lighthouse. ... [E]conomists wishing to point to a service which is best provided by the government should use an example which has a more solid backing.
Of course, one might quarrel that when it comes to the distinction between the role of government and markets in lighthouses, Coase is splitting hairs. This is a case where government is granting a right to set up what is in effect a local monopoly, and where government often also played a role (through customs agents) in collecting tolls in the ports. This is clearly not a multi-competitor free market in action. But on the other side, Coase did show that the earlier argument that government itself needed to provide lighthouses was oversimplified. The British government back in the 17th and 18th century was not choosing sites for the private lighthouses, nor was it financing their construction. Moreover, the lighthouses were private property: those who owned lighthouses could sell them, or bequeath them to their heirs. In modern terminology, Coase is saying that a public-private partnership, in which the private partner is responsible for investment but is also able to make a profit, is not the same thing as outright government provision.
There have been ongoing arguments since the 1974 Coase essay concerning how to think about the public and private roles. But there has been less discussion of how the changing role of technology might reshape the lines between public and private. Theresa Levitt argues that Coase was correct to point out the role of the private sector in lighthouses of the 17th and 18th centuries. However, she argues that changes in lens technology, greatly altering the cost and power of lighthouses, was an economic change leading back to the old wisdom that government provision of lighthouses was necessary. Her essay is "When Lighthouses became Public Goods: The Role of Technological Change" (Technology and Culture, January 2020, 61:1, pp. 144-172). She writes:
The crucial technological change was in the illumination apparatus, with the introduction of mirrors in the 1780s and Fresnel lenses in the 1820s. This was not only a change in technical performance, as each development increased the brightness by more than an order of magnitude. It also brought about the sort of social and institutional transformations that historians of technology have identified as a technological system. As lighthouses became reliably visible at safe distances for sea-coast lighting the first time, their purpose and function changed, as well as their costs and financing. The lighthouse system of the seventeenth century discussed by Coase was fundamentally different from that of John Stuart Mill and Paul Samuelson, with different expectations, expenses, and implications for excludability. While a market could support the lights that existed before 1780, which were primarily effective at close range, it could not support the transformed system that emerged in the wake of improved illumination. Nor could the market provide for the technological improvements, with no private owners of lighthouses investing in Fresnel lenses, one of the key improvements. Only after England introduced greater state intervention did the lights improve.
The private lighthouses of the 17th and 18th centuries mostly burned candles or coal, and could be seen for no more than about five miles. But in the late 18th century and into the 19th century, there was a wave of innovation involving oil lamps for illumination and lenses to focus the light out to sea. But Levitt argues that the breakthrough innovation was the Fresnel lens in 1820. France had abolished private lighthouses in 1792, and instead used a government Lighthouse Commission. This government commission hired August Fresnel to design and install this new light, which was essentially visible all the way to the horizon. Levitt describes the next step:
The French Lighthouse Commission placed Fresnel in charge of a massive overhaul of the French lighthouse system known as the Carte des phares. ... Instead of focusing on port entrances alone, the plan was now to form a rational network which would illuminate the entire coast, so that whenever a ship went out of sight of one lighthouse, it would already be entering into sight of another. ... Fresnel divided the lights into different orders based on their size, with the largest, first-order lights warning of a ship’s first approach to the coast, second-order lights aiding in the navigation of tricky passages, and the smaller “feux de port” marking port entrances. ...
One of the key attributes of the system was that it would allow mariners to distinguish between the lights, and thus know their precise location at all times. Fresnel proposed three distinct light signatures: a rotating light of eight bulls-eye panels that flashed every minute, a rotating light of sixteen panels that flashed every thirty seconds and a fixed light that gave out a continuous beam . The rotating lenses were mounted on columns that were turned first by an escapement mechanism, then by chariot wheels, and finally on a mercury bath (an idea conceived by Fresnel but not put into practice until the 1890s). The parabolic apparatus could also be rotated to produce a distinct flashing light. But Fresnel went one step further: carefully arranging the various lights so that no two similar ones were alike, and, with the visibility of lights overlapping, a sailor would be able to identify their location with precision. Jules Michelet commemorated the completion of the project in 1854 with the phrase, “For the sailor who steers by the stars, it was as if another heaven had descended to earth.”
Levitt makes a case that when John Stuart Mill was writing about lighthouses back in 1848, he was well aware of these changes. It turns out that one of Mill's childhood teaches was a British leader in efforts for upgrading Britain's lighthouses, which for a long time lagged behind those of France. The US soon adopted the French approach.
The United States had leapfrogged over Britain as well after adopting the French model of lighthouse provisioning. The colonies built ten lighthouses under British rule ... The federal government appropriated them in 1789 in the first application of the Commerce Clause. Substantial investment in infrastructure only came in the 1850s, however, when a coalition of sailors, scientists, and engineers demanded the creation of a lighthouse board modeled on the French Lighthouse Committee. This board effected a massive, tax-funded program of new building and updated technology, and by the end of 1859 the United States had more than twice as many lighthouses as the British, virtually all of them equipped them with Fresnel lenses.
Thus, the history of lighthouses suggests a lesson that for focused and local projects with static technology, a public-private partnership can work well. But for development and investment in a new technology which will be applied to an interconnected national network where it is difficult to charge end-users for value received, government may usefully play a larger role. Levitt writes:
This fact can also help us understand the lighthouse’s transformation into a public good. When lights simply marked harbors, one could charge every ship that entered the harbor. But when a light marked some empty, desolate stretch of coast, it was not so easy to charge whoever happened to pass by. Rather than being “plucked from the air,” Mill’s position accurately reflected the new situation. ... A more detailed study of lighthouse administration supports the status of the lighthouse as a public good: the private market failed to either develop or invest in the technology necessary to establish the effective sea-coast lights now associated with the term “lighthouse.”
Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.