Essential Coase: The Lighthouse in Economics

Welcome to the essential ideas of Ronald Coase.

Throughout his career, Coase urged economists to study actual history to explain behaviour

and outcomes, instead of relying too heavily on theories and generalizations.

In fact, Coase was often critical of what he called “blackboard economics,” because the

real world was full of nuances and complexities that were missed or oversimplified by theories.

And one of the best known examples from Coase's own work that highlights

the importance of studying the real world is his work on lighthouses.

Prior to Coase, economists agreed that lighthouses were a great example of a

“public good” that justified government action. Simply put, ships coming in to a port or in need

of navigation benefited from lighthouses, but it was difficult and expensive to make

ships pay for the use of the light, and even if you could get some ships to pay, you wouldn't

be able to stop other ships who refused to pay from seeing and using the light, too.

And so, since lighthouses were necessary for safe navigation but couldn't be paid

for by the ships themselves, Economists asserted that lighthouses had to be built

and managed by government and paid for by taxes. But Coase wasn't satisfied with the conventional

economic explanation, and set out to study the actual history of lighthouses in Britain.

What he found was that from the 1500s to the 1800s, there were many examples of

private lighthouses along the British coast. And the owners of those private lighthouses

charged boats for the use of the lighthouse through port fees and

“pilotage” - which is the practice of hiring a local pilot to navigate a ship into port.

In short, Coase discovered that the history of lighthouses—and their

description as a public good—were much more complicated than the simple theory suggested.

Instead of being the best example of a public good, the history of lighthouses showed how the

innovation and creativity of entrepreneurs and business owners can overcome pricing challenges,

thus avoiding the need for government intervention.

Coase's analysis sparked greater interest in studying real-world economic history.

For more information on Ronald Coase, visit EssentialCoase.org

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