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TheLighthouseinEconomicsAuthor(s):R.H.CoaseSource:JournalofLawandEconomics,Vol.17,No.2(Oct.,1974),pp.357-376Publishedby:TheUniversityofChicagoPressStableURL::27/09/200809:15YouruseoftheJSTORarchiveindicatesyouracceptanceofJSTOR'sTermsandConditionsofUse,availableat://=ucpress.EachcopyofanypartofaJSTORtransmissionmustcontainthesamecopyrightnoticethatappearsonthescreenorprintedpageofsuchtransmission.JSTORisanot-for-profitorganizationfoundedin1995tobuildtrusteddigitalarchivesforscholarship.Weworkwiththescholarlycommunitytopreservetheirworkandthematerialstheyrelyupon,andtobuildacommonresearchplatformthatpromotesthediscoveryanduseoftheseresources.FormoreinformationaboutJSTOR,pleasecontactsupport@jstor.org.TheUniversityofChicagoPressiscollaboratingwithJSTORtodigitize,preserveandextendaccesstoJournalofLawandEconomics.*R.H.COASEUniversityofChicagoLawSchoolI.INTRODUCTIONTHElighthouseappearsinthewritingsofeconomistsbecauseofthelightitissupposedtothrowonthequestionoftheeconomicfunctionsofgovernment.Itisoftenusedasanexampleofsomethingwhichhastobeprovidedbygovernmentratherthanbyprivateenterprise.Whateconomistsusuallyseemtohaveinmindisthattheimpossibilityofsecuringpaymentfromtheownersoftheshipsthatbenefitfromtheexistenceofthelighthousemakesitunprofitableforanyprivateindividualorfirmtobuildandmaintainalight-house.JohnStuartMillinhisPrinciplesofPoliticalEconomy,inthechapterOftheGroundsandLimitsoftheLaissez-FaireorNon-InterferencePrinciple,said:...itisaproperofficeofgovernmenttobuildandmaintainlighthouses,establishbuoys,etc.forthesecurityofnavigation:forsinceitisimpossiblethattheshipsatseawhicharebenefitedbyalighthouse,shouldbemadetopayatollontheoccasionofitsuse,noonewouldbuildlighthousesfrommotivesofpersonalinterest,unlessindemnifiedandrewardedfromacompulsorylevymadebythestate.xHenrySidgwickinhisPrinciplesofPoliticalEconomy,inthechapter,TheSystemofNaturalLibertyConsideredinRelationtoProduction,hadthistosay:...thereisalargeandvariedclassofcasesinwhichthesupposition[thatanindividualcanalwaysobtainthroughfreeexchangeadequateremunerationfortheservicesherenders]wouldbemanifestlyerroneous.Inthefirstplacetherearesomeutilitieswhich,fromtheirnature,arepracticallyincapableofbeing*ItiswithgreatpleasurethatIacknowledgethehelpfulnessofmembersofTrinityHouseandofofficialsintheDepartmentofTradeandoftheChamberofShippinginprovidingmewithinformationontheBritishlighthousesystem.Theyarenot,however,inanywayresponsiblefortheuseIhavemadeofthisinformationandshouldnotbepresumedtosharetheconclusionsIdraw.xJohnStuartMill,PrinciplesofPoliticalEconomy,in3TheCollectedWorksofJohnStuartMill968(ed.J.M.Robson,1965).357358THEJOURNALOFLAWANDECONOMICSappropriatedbythosewhoproducethemorwouldotherwisebewillingtopurchasethem.Forinstance,itmayeasilyhappenthatthebenefitsofawell-placedlight-housemustbelargelyenjoyedbyshipsonwhichnotollcouldbeconvenientlyimposed.2PigouintheEconomicsofWelfareusedSidgwick'slighthouseexampleasaninstanceofuncompensatedservices,inwhichmarginalnetproductfallsshortofmarginalsocialnetproduct,becauseincidentalservicesareperformedtothirdpartiesfromwhomitistechnicallydifficulttoexactpayment.3PaulA.Samuelson,inhisEconomics,ismoreforthrightthantheseearlierwriters.InthesectionontheEconomicRoleofGovernment,hesaysthatgovernmentprovidescertainindispensablepublicserviceswithoutwhichcommunitylifewouldbeunthinkableandwhichbytheirnaturecannotappro-priatelybelefttoprivateenterprise.Hegivesasobviousexamples,themaintenanceofnationaldefense,ofinternallawandorder,andtheadminis-trationofjusticeandofcontractsandheaddsinafootnote:Hereisalaterexampleofgovernmentservice:lighthouses.Thesesavelivesandcargoes;butlighthousekeeperscannotreachouttocollectfeesfromskippers.So,saystheadvancedtreatise,wehavehereadivergencebetweenprivateadvantageandmoneycost[asseenbyamanoddenoughtotrytomakehisfortunerunningalighthousebusiness]andtruesocialadvantageandcost[asmeasuredbylivesandcargoessavedincomparisonwith(1)totalcostsofthelighthouseand(2)extracoststhatresultfromlettingonemoreshiplookatthewarninglight].Philosophersandstatesmenhavealwaysrecognizedthenecessaryroleofgovernmentinsuchcasesofexternal-economydivergencebetweenprivateandsocialadvantage.4LaterSamuelsonagainreferstothelighthouseasagovernmentactivit[y]justifiablebecauseofexternaleffects.Hesays:Takeourearliercaseofalighthousetowarnagainstrocks.Itsbeamhelpsevery-oneinsight.Abusinessmancouldnotbuilditforaprofit,sincehecannotclaimapricefromeachuser.Thiscertainlyisthekindofactivitythatgovernmentswouldnaturallyunderta