The Lighthouse in Economics

THELIGHTHOUSEINECONOMICSI.IntroductionThelighthouseappearsinthewritingsofeconomistsbecauseofthelightitissupposedtothrowonthequestionoftheeconomicfunctionsofgovernment.Itisoftenusedasanexampleofsomethingwhichhastobeprovidedbygovernmentratherthanbyprivateenterprise.Whateconomistsusuallyseemtohaveinmindisthattheimpossibilityofsecuringpaymentfromtheownersoftheshipsthatbenefitfromtheexistenceofthelighthousemakesitunprofitableforanyprivateindividualorfirmtobuildandmaintainalighthouse.JohnStuartMillinhisPrinciplesofPoliticalEconomy,inthechapter“OftheGroundsandLimitsoftheLaissez-FaireorNon-InterferencePrinciple,”said:…itisaproperofficeofgovernmenttobuildandmaintainlighthouses,establishbuoys,etc.forthesecurityofnavigation:forsinceitisimpossiblethattheshipsatseawhicharebenefitedbyalighthouse,shouldbemadetopayatollontheoccasionofitsuse,noonewouldbuildlighthousesfrompersonalinterest,unlessindemnifiedandrewardedfromacompulsorylevymadebythestate.1HenrySidgwickinhisPrinciplesofPoliticalEconomy,inthechapter,“TheSystemofNaturalLibertyConsideredinRelationtoProduction,”hadthistosay:…thereisalargeandvariedclassofcasesinwhichthesupposition[thatasindividualcanalwaysobtainthroughfreeexchangeadequateremunerationfortheservicesherenders]wouldbemanifestlyerroneous.Inthefirstplacetherearesomeutilitieswhich,fromtheirnature,arepracticallyincapableofbeingappropriatedbythosewhoproducethemorwouldotherwisebewillingtopurchasethem.Forinstance,itmayeasilyhappenthatthebenefitsofawell-placedlighthousemustbelargelyenjoyedbyshipsonwhichnotollcouldbeconvenientlyimposed.2PigouintheEconomicsofWelfareusedSidgwick’slighthouseexampleasaninstanceofuncompensatedservices,inwhich“marginalnetproductfallsshortofmarginalsocialnetproduct,becauseincidentalservicesareperformedtothirdpartiesfromwhomit3istechnicallydifficulttoexactpayment.”PaulA,Samuelson,inhisEconomics,ismoreforthrightthantheseearlierwriters.Inthesectiononthe“EconomicRoleofGovernment,”hesaysthat“governmentprovidescertainindispensablepublicserviceswithoutwhichcommunitylifewouldbeunthinkableandwhichbytheirnaturecannotappropriatelybelefttoprivateenterprise.”Hegivesas“obviousexamples,”themaintenanceofnationaldefense,ofinternallawandorder,andtheadministrationofjusticeandofcontractsandheaddsinafootnote:…hereisalaterexampleofgovernmentservice:lighthouses.Thesesavelivesandcargoes;butlighthousekeeperscannotreachouttocollectfeesfromskippers.“So,”saystheadvancedtreatise,“wehavehereadivergencebetweenprivateadvantageandmoneycost[asseenbyamanoddenoughtotrytomakehisfortunerunningalighthousebusiness]andtruesocialadvantageandcost[asmeasuredbylivesandcargoessavedincomparisonwith(1)totalcostsofthelighthouseand(2)extracoststhatresultfromlettingonemoreshiplookatthewarninglight].”Philosophersandstatesmenhavealwaysrecognizedthenecessaryroleofgovernmentinsuchcasesof“external-economydivergencebetweenprivateandsocialadvantage.”4LaterSamuelsonagainreferstothelighthouseasa“governmentactivityjustifiablebecauseofexternaleffects.”Hesays:1JohnStuartMill,PrinciplesofPoliticalEconomy,in3TheCollectedWorksofJohnStuartMill968(ed.J.M.Robson,1965)2HenrySidgwick,PrinciplesofPoliticalEconomy,406(3rded,1901)3A.C.Pigou.EconomicsofWelfare4PaulA,Samuelson,Economics:AnIntroductoryAnalysis45(6thed.1964).AllreferencestoSamuelson’sEconomicswillbetothe6thedition.Takeourearliercaseofalighthousetowarnagainstrocks.Itsbeamhelpseveryoneinsight.Abusinessmancouldnotbuilditforaprofit,sincehecannotclaimapricefromeachuser.Thiscertainlyisthekindofactivitythatgovernmentswouldnaturallyundertake.5Samuelsondoesnotleavethematterhere.Healsousesthelighthousetomakeanotherpoint(onenotfoundintheearlierwriters).Hesays:…inthelighthouseexampleonethingshouldbenoticed:“Thefactthatthelighthouseoperatorscannotappropriateintheformofapurchasepriceafeefromthoseitbenefitscertainlyhelpstomakeitasuitablesocialorpublicgood.Buteveniftheoperatorswereable—say,byradarreconnaissance—toclaimatollfromeverynearbyuser,thatfactwouldnotnecessarilymakeitsociallyoptimalforthisservicetobeprovidedlikeaprivategoodatamarket-determinedindividualprice.Whynot?Becauseitcostssocietyseroextracosttoletoneextrashipusetheservice;henceanyshopsdiscouragedfromthosewatersbytherequirementtopayapositivepricewillrepresentasocialeconomicsloss—evenifthepricechargedtoallisnomorethanenoughtopaythelong-runexpensesofthelighthouse.Ifthelighthouseissociallyworthbuildingandoperating—anditneednotbe—amoreadvancedtreatisecanshowhowthissocialgoodisworthbeingmadeoptimallyavailabletoall.6ThereisanelementofparadoxinSamuelson’sposition.Thegovernmentgastoprovidelighthousesbecauseprivatefirmscouldnotchargefortheirservices.Butifitwerepossibleforprivatefirmstomalesuchachargetheyshouldnotbeallowedtodoso(whichalsopresumablycallsforgovernmentaction).Samuelson’spositionusquitedifferentfromthatofMill,SidgwickorPigou.AsIreadthesewriters,thedifficultyofchargingfortheuseofalighthouseisaseriouspointwithimportantconsequencesforlighthousepolicy.Theyhadnoobjectiontochargingassuchandtherefore,ifthiswerepossible,totheprivateoperationoflighthouses.