Market Theory and the Lighthouse System

Abstract

In this chapter, we point out that Kirzner’s focus on the market process and entrepreneurial alertness to profit opportunities that come from improving allocative efficiency (or pushing back the frontiers of production possibilities) is universal in that it can be applied to what appears to be the most unassailable “bailey” of market failure theory. To do so, we consider the historical case of lighthouses which, because the light they produced to guide ships in the age of sail was non-rivalrous and non-excludable, is considered the textbook example of a “pure” public good. We point to recent research that show that the market process could have led to the production of efficient maritime safety services but that it was prevented from operating by state-mandated monopolistic guilds. As such, we argue that even this seemingly impregnable bailey of market failure theory fails to withstand Kirzner’s argument.

Keywords: Israel Kirzner; Lighthouses; Efficiency; Regulation

JEL Classification: B53; D72; L51