Academic journal article The Town Planning Review

The Political Economy of Coase's Lighthouse in History (Part I): A Review of the Theories and Models of the Provision of a Public Good

Academic journal article The Town Planning Review

The Political Economy of Coase's Lighthouse in History (Part I): A Review of the Theories and Models of the Provision of a Public Good

Article excerpt

As a contribution to policy planning for public goods provision, Part I of this multi-disciplinary article critically reviews the literature and facts for and against the 1974 paper by Ronald Coase on the lighthouse; discusses theoretical issues omitted; and develops a model that characterises an alternative mode of light due collection under different cost and demand conditions. The review and discussion, informed by the precise meanings of key concepts of public goods and a free market, are relevant for a study and application of the economics of planning as well as the changing nature of the lighthouse due to technological advances in shipping.

Policy and theoretical background

A lighthouse appeals to the conservation planner as an archaic yet picturesque and possibly romantic structure worthy of conservation as part of heritage. Why not? It brings back memories of many brave rescue stories, of solitary lighthouse keepers, and it stirs the imagination as a beacon of hope or despair, as a marker of mental arrivals and departures in the dinghy of life. Perhaps for this reason, the Statue of Liberty has been advertised for its history of being a lighthouse. That said, there is a negative side for the conservation planner: a lighthouse is an ecological threat to marine birds (Montevecchi, 2005). This article is not about the preservation of lighthouses either for historical reasons or for their dwindling contribution to global light pollution, but something less sentimental. What follows is important in planning theory, albeit both rather controversial and quite technical.

One of the challenges to a town planner is working out how market failure can be minimised or ideally transformed into positive externalities (Lai and Lorne, 2006; Lai and Hung, 2008). In theorising land use planning, this challenge cannot be properly met without a good understanding of the nature of three types of market failures, namely externalities, public goods, and monopolies, all of which are rampant in the development market.

For this reason, courses on the economics of planning invariably devote great attention to the ideas of Arthur Pigou, Cambridge Professor of Economics and contemporary of John Maynard Keynes. Against Pigou's concepts of externalities and public goods written in The Economics of Welfare (Pigou, 1932), 1991 Nobel laureate Ronald Coase, who first met Friedrich A. Hayek in LSE, has written two extremely influential papers, 'The problem of social cost' (Coase, 1960) and 'The lighthouse in economics' (Coase, 1974), which have been respectively taken by many libertarian thinkers as the death knell of interventionist planning against externalities and of public funding for public goods.

In each of these two papers, an example that has become classic in the theorisation of market failure is used. In the 1960 paper, a hypothetical example of cattle escaping from a ranch to a wheat farm is used with a view to demolishing Pigou's theory (Pigou, 1932) of social cost (externalities) as demonstrated by the real-life example of an air-polluting factory. Economics students should not be surprised that this work of Coase is both theoretically and practically more significant to town planners than economists, since the example used basically addresses a matter of land use zoning.

Less well-cited, but no less significant than the cattle-wheat example, is Coase's exposition of the lighthouse in English history. Coase intended this synchronic exposition to critique what he saw to be the erroneous expositions of this maritime example mentioned in a string of late nineteenth- and early to mid twentieth-century works by John Stuart Mill (1965), Henry Sidgwick (1901), Arthur Pigou (1932), and Paul Samuelson (1964). These prominent thinkers thought that direct government provision of the service was essential.

Generally, policy interest in the lighthouse focuses on the role of government in the provision of a service that has problems of non-exclusive use. …

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