The Lighthouse

In this essay I will be looking at the lighthouse, with a special reference with the lighthouse in Iceland and the UK. Economic literature has a lot of writing about this subject matter. The lighthouse is often used as an example of a good that has to be provided by government. This is because it considered a non-excludable, non-rivalry good. Once you have built one, anybody can use it. Sometimes these kinds of goods are called public goods. We want to see if the definition of the lighthouse as a public good is entirely correct. (Kohn, 2002)

Public goods

Public goods are goods that are non-rival and non-excludable. That means that consumption of the good doesn´t reduce the availability of the good for others and people can´t really be excluded from using them. This is in contrast with a service from someone whom is for example a C.P.A. He can effectively bar people from entry into his office and once a single person uses his service there is less of this service for other people. This public good non-rival and non-excludable form, can cause a so called free-rider problem. (Investopedia ULC, 2012)

The free rider

We find free rider problems in situations where we have a person (or persons) and a good (or goods) that are non-excludable and non-rivalry. Then the person will be able to consume the resource without paying the fair fees for the product. An example of this is national defence. Every single person in a country will be defended by the borders or army of a particular country. That includes people that don´t pay taxes. They are free-riders (Investopedia ULC, 2012). This sometimes leads to the government providing the service. A good example of that is in fact national defence and most lighthouses (in economic textbooks at least) (Kohn, 2002). This removes the problem of free-riders because the government charges everybody for use and therefore the incentive of free-riding is gone. Everybody pays. This is not the only possible solution for free riding. Another solution that can be used is turning goods into so called club goods. (Wisdom Supreme, 2004-2012)

Club goods

When goods are made artificially scarce they are in effect turned into so called club goods. These goods are sub types of public goods and are excludable and non-rivalrous (Wisdom Supreme, 2004-2012). An example of a club good is membership in a country club, where you can play golf, for instance.

A bit of history

In the latter part of the 1800´s when Iceland just recently got the right to pass its own laws a couple of congressmen introduced a bill. They wanted every ship that docked in a harbor that was in the south-western part of Iceland (or thereabouts) to pay a fee. They imagined that this fee could be used to pay for the operating costs of a lighthouse in the area. Because Iceland was run as a part of Denmark until that time period, Icelanders had to put up with their policies. That meant that because there wasn´t a lot of shipping traffic in the area. There would be no lighthouses built, as that was the Danish prerogative. But this would become an ever growing problem for the people that wanted to do business in the area as business increased, slowly but surely, increasing traffic along the way. Eventually a lighthouse was built in Reykjanes, a couple of decades before the turn of the century. The building process was arduous (but not impossible). They had substantial cost overruns. Another similar bill was in fact approved by the legislature around the same time and every single boat that would dock in the area would eventually have pay a lighthouse fee. Not a lot happened in these matters in the following two decades in the country. But these matters would then change fairly quickly in first decades of the next century as lighthouses were built all around the country, albeit most of them were much smaller than the first one. (Guðmundur Bernódusson, Guðmundur L. Hafsteinsson, & Kristján Sveinsson, 2002)

More history

In the England in the 1700´s there was a different system. They had a principal lighthouse authority that evolved out of a medieval seaman´s guild. They established a number of lighthouses in the 1700´s (and even earlier). However, in spite of this principal authority there were a lot of lighthouses that were built by private individuals. The method that they used was to obtain a patent from the crown that said that they could build a lighthouse and then they could levy tolls on any ship that benefitted from the lighthouse. They obtained this patent by collecting signatures from seafaring men. When the lighthouse was operational private individuals or (in most cases) customs officials would collect the toll in corresponding harbors from anybody that was considered to make personal gain from the lighthouse. (Coase, 1974, pp. 362-365)

In conclusion

It is interesting to note that the lighthouse is often used as an example of a public good in economic textbooks (Kohn, 2002). As we see lighthouses in this essay that should really be classified as club goods, both in Iceland and the UK. I will note that the club good is a form of public good as is stated earlier. But the lighthouse is surely not always non-excludable (something that public goods are, by a matter of definition). Maybe it is time for the textbooks to find better examples.

Sigurgeir Þór Hreggviðsson

 

References

Coase, R. (1974). The lighthouse in Economics. Journal of Law and Economics, Vol.17, No. 2 , 357-376.

Guðmundur Bernódusson, Guðmundur L. Hafsteinsson, & Kristján Sveinsson. (2002). Vitasaga Íslands. Kópavogur: Siglingamálastofun Íslands.

He, M., & Chen , J. (2009). Sustainable Development and Corporate Environmental Responsibility: Evidence from Chinese Corparations.Springer Science+Business Media B.V.

Investopedia ULC. (2012). Investopedia. Sótt 3. March 2012 frá Investopedia: http://www.investopedia.com/terms/p/public-good.asp#axzz1pTeUfWk0

Investopedia ULC. (2012). Investopedia. Retrieved March 17, 2012, from Investopedia: http://www.investopedia.com/terms/f/free_rider_problem.asp#axzz1pTeUfWk0

Kohn, D. (2002, 12 28). DanKohn.com. Retrieved March 19, 2012, from DanKohn.com: http://www.dankohn.com/archives/279

Wisdom Supreme. (2004-2012). WS. Retrieved March 18, 2012, from WS: http://www.wisdomsupreme.com/dictionary/theory-of-clubs.php