Market Theory and the Lighthouse System

Abstract

We revisit the controversy over whether lighthouses exemplify a public good requiring government provision. We do so in terms of the following question: what effect does government regulation have on the relationship between entrepreneurship and the private governance of property rights, particularly as it pertains to the private provision of public goods? We orient our argument around Israel Kirzner’s account of the market process and entrepreneurial alertness to profit opportunities that come from improving allocative efficiency (or pushing back the frontiers of production possibilities). This account of the market process can be applied to what appears to be the most unassailable “bailey” of market failure theory: the private provision of lighthouses. 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