December 23, 2002
Score: Daniel Davies, 393; Ronald Coase, 0

Daniel Davies has a long and very nice note trashing Ronald Coase's claim that British lighthouses were provided by "private enterprise". As Coase says:

Economists had always used [lighthouses] as a service that had to be provided by government. How could a private provider ever be paid for it? So without government operation you wouldn't get lighthouses. My usual practice is to look into what actually happens, and if you look into what actually happens you discover that there's a long period in which lighthouses were provided by private enterprise. They were financed by private people, they were built by private people, they were operated by the people who had the rights to the lighthouses, which they could bequeath to others and sell.

As Davies writes, "Coase is very strongly implying, when he says that 'lighthouses were provided by private enterprise', 'no one would build a lighthouse with the idea of making a fortune [...] people did build lighthouses and did make a fortune' and poo-poos the extent to which government involvement was a factor, that lighthouses were built in much the same way in which any other entrepreneurial business invests in capital assets. He is implying without saying that the problem of non-excludability of light which gave rise to Samuelson's public good argument, was solved by free negotiation among the parties involved, and that all exchanges of light for money resembled normal market transactions between willing counterparties."

This is complete nonsense. Private lighthouse operators would not negotiate a market price for "lighthouse services" with passing ships. The King gave lighthouse operators the power to demand payment from passing ships. And "...a system under which the government of the day gives you the authority to demand a payment from every ship that enters a port, and which states that failure to recognise this authority is treason (at the time, punishable by death), does not really look to me to be very much like a free market exchange. In fact, in giving the producer of a product the authority to demand on pain of death or imprisonment that everyone in a particular market has to buy their product, would seem to me to be... government involvement..."


D-squared Digest -- A fat young man without a good word for anyone: Shine your light on me ...

In keeping with old tradition, I would like to dedicate this post to those men who will be spending Christmas alone, in the lighthouses around our coast, selflessly guarding against wrecks in solitude.

Actually all UK lighthouses have been converted to automatic operation for quite a couple of years now, so instead of that, today’s post is dedicated to Jim Glass, a regular inhabitant of various comments sections who has done an admirable job in keeping me honest over the last week. Post-lunch (that being the only real excuse), I have on various occasions shot my mouth off on the subjects of Adam Smith never mentioning the Physiocrats in “Wealth of Nations” (he did) and of Ronald Coase not having had a really nasty spat with Paul Samuelson on the issue of lighthouses (he did). So well done Jim for picking me up on both of ‘em, and we’ll ignore the fact that he called Wynne Godley a crank (them’s fightin’ words).

In any case, one of the good things to have come out of my little rush of blood to the head is this link: The History of British Lighthouses, provided by the British Lighthouse Society. It’s so interesting that I ended up dropping what I was doing (the threatened “longer piece” from the last post) and decided to instead investigate the Coase-Samuelson controversy on lighthouses. Stick with me, I promise that this is less boring than it sounds.

The Controversy

First up, I’m going to need to make a full disclosure; I haven’t read the full Coase paper on lighthouses in economic history, because it isn’t on the Web and I haven’t had time to get hold of the book. However, a quick google search for "Coase lighthouses" reveals a lot about the subject, and I've looked through those pretty thoroughly. In any case, the use to which an academic article is put, is usually much more important to the generality of the world, than the specifics of what was said in the first place. It is my opinion, (an unpopular one with academics) that academic economics ought to be subject to the same sort of product liability as handguns are; that there is a duty on the manufacturer to go out of his way to make sure that no harmful use is made of his product, and that it is not good enough to simply drop a concept as toxic as "shock therapy privatisations" or "liberalised capital markets" into the world and then blame other people for abusing it.

So anyway, the original Samuelson-Coase controversy. It stems back to a paper by Coase on "The Lighthouse in Economics", which set out as an attack on the typical use made by economists of lighthouses as a public good. Lighthouses make a pretty good example for explaining to undergraduates what a public good is, because they are paradigmatically non-excludable; you can't stop them from shining on people who didn't pay for them. The main thrust of Coase's article was against comments made by Mill, Pigou and others, but he also paused to have a crack at Samuelson, who at that time was author of the most popular economics textbook, and who had used this bog-standard example in the chapter on public goods.

The problem being, unfortunately, and as far as I can see, that like so many well-meaning New Deal liberals of his kind, Samuelson had to have a fucking cherry on top of it. He wrote in his book that, not only did the non-excludability of lighthouse light mean that it was unlikely that yer basic Arrow-Debreu model of competitive equilibrium would converge on the optimal level of lighthouse production, but that he actually had something approaching a mathematical proof that the only possible way in which you could provide lighthouses properly was to pay for them out of general taxation, and then to give their services to the shipping public for free. This was actually not something that Samuelson needed to argue his point; as far as I can tell, he was just trying to hammer home the concept of marginal cost pricing; the marginal cost to a lighthouse of shining on another ship is zero, so the marginal cost to a ship of being shone on ought to be zero in an optimal solution. But in trying to punch home this message to the thick kids, he left what can only be described as a massive bloody great hostage to fortune.

The hostage to fortune being that, as anyone who fancies joining the British Lighthouse Society will tell you, for most of the history of the United Kingdom, a sizeable proportion of its lighthouses have been owned, operated and financed by private individuals and corporations. This revelation was the main theme of Coase's lighthouse paper, and since in general economists are revolted and terrified by anyone who appears to have anything approaching a clue about the facts of a matter, it threw the profession into hysterics Samuelson in particular, appears to have lost his temper a bit.

Of course, neoclassical economists being the chaps they are, this hasn't stopped the profession from continuing to use the lighthouses example as if there was no problem with it. However, as is usually the result when this particular pathology of the profession swings into action (viz, the Cambridge Capital Controversy, a past and future subject of this blog), ignoring the lighthouses problem didn't make it go away. A quick glance at that Google search reveals that there are a lot of people out there on the Internet who believe that orthodox neoclassicism said that only the government could build lighthouses, that Coase showed that free markets provided optimal levels of lighthouses, and that this disproves that there could ever be public goods. Score another victory for the head-in-the-sand faction of the modern economics profession.

But what's the truth about lighthouses?
Looking through the actual history, however, it is hard not to come away with the feeling that Coase materially over-sold his results, and that Samuelson was hard done by. Thanks to Jim Glass for this extract from an interview with Coase in Reason magazine in 1993.

Reason: What can you tell us about lighthouses?

Coase: Economists had always used this as a service that had to be provided by government. How could a private provider ever be paid for it? So without government operation you wouldn't get lighthouses. My usual practice is to look into what actually happens, and if you look into what actually happens you discover that there's a long period in which lighthouses were provided by private enterprise. They were financed by private people, they were built by private people, they were operated by the people who had the rights to the lighthouses, which they could bequeath to others and sell.

Some have said what happened in lighthouses wasn't really private enterprise. The government was involved in some way in setting the rights and so on. I think that's humbug because you could say that there's no private property in houses by that logic, since you can't transfer your rights to a house without the examination of title and registration and without obeying a whole series of regulations, many enforced by government.

Reason: I thought it was interesting that the shippers were the ones that lobbied to get the toll because they wanted the incentive for the private investor to build the lighthouse. What reaction have you had over the years when Paul Samuelson or other economists would use this example of the lighthouse as a necessary government function?

Coase: Samuelson says I was wrong and he was right, and he froths at the mouth when people talk about the lighthouse example. He says Coase is wrong; he doesn't overcome the free rider problem. Who are the free riders? The foreign ships going past the British coast which do not call at a British port. Using Samuelson's approach, what do you do? Do you ask the foreign governments to give you a subsidy? Do you tax people in Britain because the foreign ships are getting help without paying for it? What do you do?

My approach is to compare the alternatives. People like Samuelson like to set up a perfect world and say that the market does not bring us to this point and imply that the government should do something. They stop their analysis at that point.

Reason: Certainly if the government builds the lighthouses and operates them at a zero price to the shippers, there's a huge free rider problem there, free riding on the taxpayer. But you had to go back to the early days to find the private ownership?

Coase: Yes, that's right. From 1838 or some such date, I can't remember it, the lighthouse people were bought out and compensation was given. Samuelson says that no one would build a lighthouse with the idea of making a fortune. Actually, people did build lighthouses and did make a fortune.


Lots of extremely disingenuous stuff here. Like I say, I haven't actually read the original paper, but assuming that Coase was paraphrasing his side of the controversy accurately, we can straight away make a couple of points:


  • Coase and Samuelson are talking at cross purposes. Samuelson is talking about the optimal level of lighthouse provision, and suggesting that the observed outcome may not have been optimal (presumably what he meant by "he doesn't overcome the free rider problem"). Coase is assuming that Samuelson thought that lighthouses couldn't be provided at all without government intervention
  • Coase is very strongly implying, when he says that "lighthouses were provided by private enterprise", "no one would build a lighthouse with the idea of making a fortune [...] people did build lighthouses and did make a fortune" and poo-poos the extent to which government involvement was a factor, that lighthouses were built in much the same way in which any other entrepreneurial business invests in capital assets. He is implying without saying that the problem of non-excludability of light which gave rise to Samuelson's public good argument, was solved by free negotiation among the parties involved, and that all exchanges of light for money resembled normal market transactions between willing counterparties.

Let's look at the evidence

First a preliminary; people build lighthouses for all sorts of reasons, but there is only an interesting economic problem with respect to one or two kinds. Lighthouses which are built in order to guide ships into a port are not problematic in the slightest. They are a service used only by users of the port, they are paid for by the port authority, and one collects revenue for their upkeep by going round to the ship when it docks and asking for it, bundled with the rest of the services which the port fee buys you. Furthermore, you only make use of this sort of lighthouse if you're going into the port, so the people who use it can be separated from the people who don't and charged accordingly. Samuelson never gave the impression that he thought ports were public goods, so there is no reason to suspect that he thought that port lighthouses should be a particular problem

There is another kind of lighthouse, however, which is much more of a problem. If you want a lighthouse to warn ships away from a hazard of some sort, rather than to draw them toward a port, then you do have a problem in collecting your revenue; if you're manning the lighthouse on Eddystone Rock, then if you're in a position to walk over to a captain to deliver your bill, he's most likely not in a position to pay you, because he's crashed. In this case, it's also much more difficult to establish who used the lighthouse, and next to impossible, with light as it is currently designed, to stop someone from using it if they aren't prepared to pay. Hence the problem. Obviously, some lighthouses perform both functions (think of a port located next to some rocks), but it's worth noting at this point, that "lighthouses" don't form a homogeneous class of capital assets.

But anyway, it seems strange to me that Coase used the date of 1838 in talking about privately owned lighthouses. Assuming he means 1836, when Trinity House began to buy out the privately owned lighthouses, this marked the end of privately built lighthouses, not the beginning. There had actually been privately owned lighthouses for more than five hundred years.

How do we know this? Well, there exists a Royal Patent dated 1261, in which Henry III allowed some private individuals to collect "light duties" from shipping to pay for the upkeep of a light. As Ken Trethewey's excellent history puts it:

These Patents were the ultimate permission of the monarch and given under the 'Divine Right of Kings'. To fail to acknowledge this authority was considered treasonable. The Patent was given to the Barons of the Cinque Port of Winchelsea who were entitled to collect two pence from every ship that entered their port. This is the origin of the entire principle by which lighthouses have been operated for centuries right up to the present: a system of taxation known as 'light dues' based on the rule that the user pays.

To be honest, a system under which the government of the day gives you the authority to demand a payment from every ship that enters a port, and which states that failure to recognise this authority is treason (at the time, punishable by death), does not really look to me to be very much like a free market exchange. In fact, in giving the producer of a product the authority to demand on pain of death or imprisonment that everyone in a particular market has to buy their product, would seem to me to be very much more government involvement indeed, than the current rather light regulation of the housing market. I'm not saying that the analogy Coase used in that Reason magazine interview was completely outrageously misleading. I'm just sayin'.

There are numerous other episodes in Trethewey's history which rather demonstrate that the provision of lighthouses by private individuals was about a million miles away from your classic interpretation of a free market. The debacle of the Isle of Man, on which ships were regularly scuppered between 1771 and 1818 while Trinity House and a group of shipowners wrangled with a Mr Ludwidge over the matter of a poorly located proposed lighthouse which ships passing en route to Liverpool would have to pay for despite being exposed to the risks of the Calf of Man (which remained unlit). There is the case of Sir John Clayton, who obtained patents for five lighthouses, but only ever showed a light in two of them, precisely because his patent did not provide for him to charge a compulsory levy. And there are numerous accounts of "rent-seeking" behaviour in lighthouses, whereby lighthouse entrepreneurs with good political connections sought to build unnecessary lighthouses in anticipation of the stream of light duties they would be allowed to extract.

From all of the above, I draw two conclusions:


  1. Ronald Coase is going straight on the "always check" list, which is a pity, because I've always liked his work. The analogy to house purchases is insanely misleading; the main source of revenue for private lighthouse owners was a compulsory levy, which was backed by full force of statute law and which was even collected by HM Customs and Excise on behalf of the lighthouse owners! This is either horrendous historical scholarship or intentional misrepresentation; subject to the caveat that he may have been misquoted by Reason magazine or misrepresented his own work in the interview, I have to say that the lighthouse study does not prove what Coase and his admirers seem to think it proves (a couple of prominent economists agree on this point)
  2. Second on methodology, while the source of my sympathy for Coase is his methodology; his determination to always look for the real world example rather than the "blackboard economics" proof, this is one area in which he and Samuelson both screwed up, and it was by adopting the arrogance which is the hallmark of the economics profession. Samuelson had a good argument about the optimal provision of lighthouses, and if he'd studied the history, he would have come up with the Isle of Man and Sir John Clayton examples to show that non-excludability of lighthouse services led to real problems, which caused real ships to avoidably crash. But he had to, as I say, put a fucking cherry on top by overextending his sensible blackboard argument into a generalisation about the world. Coase then, correctly and admirably, called him on it by falsifying the generalisation, but then fell into the trap of forcing the pieces to fit into his own grand blackboard generalisation -- that free market negotiation between willing participants could always solve problems of resource allocation so long as property rights were well defined.

We shall conclude this sermon with a hymn:

Eternal Father, strong to save,
Whose arm hath bound the restless wave,
Who biddest the mighty ocean deep
Its own appointed limits keep;
Oh, hear us when we cry to Thee,
For those in peril on the sea!

Posted by DeLong at December 23, 2002 08:12 AM | Trackback

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Comments

I love this: "He is implying without saying...."

Meaning that Daniel Davies can't deal with what Coase actually said. Nor with what Samuelson actually said either.

Taking the latter first, he made TWO claims about lighthouses in his famous textbook, (1) they wouldn't be built privately because of the impossibility of charging for their use, and (2) even if it was possible to charge the users, it wouldn't be optimal to do so.

Thus his conclusion: "This certainly is the kind of activity that government would naturally undertake.".

Coase tells us that Samuelson was definitely wrong about (1) historically (which Daniel has finally admitted). And about (2), there is no evidence that this is so, and plenty that it is not.

This is really a very simple issue, the lighthouse entrepreneurs found a way to bundle their service with other services (in the actual port), much the same way radio stations bundle their service of providing programming with an audience they can sell to advertisers. All government had to do was establish property rights, and enforce them.

Even without the Royal Authority establishing "light duties", lighthouse keepers could have bargained with port owners to have them collect for the light service--fewer ships wrecked meant more ships visiting ports. In which case you really would have had free enterprise.

I also love this from D squared:

"I'm not saying that the analogy Coase used in that Reason magazine interview was completely outrageously misleading."

But shortly thereafter we get: "The analogy to house purchases is insanely misleading", and "horrendous historical scholarship or intentional misrepresentation".

All of which from a guy who admits not having even read Coase's article! Elsewhere, d squared compared Coase to the disgraced Michael Bellesilles, who had actually made up evidence from thin air.

But even what he did read of Coase he badly misunderstands. For instance, Davies writes:

"But anyway, it seems strange to me that Coase used the date of 1838 in talking about privately owned lighthouses. Assuming he means 1836, when Trinity House began to buy out the privately owned lighthouses, this marked the end of privately built lighthouses, not the beginning."

How could anyone misunderstand that that was Coase's point:

"Coase: Yes, that's right. From 1838 or some such date, I can't remember it, the lighthouse people were bought out and compensation was given."

And if we actually read Davies own source we see that it is he, not Coase who is confused:

http://www.btinternet.com/~k.trethewey/owner.html

>> The costly end to private lighthouse ownership

>> In England and Wales private ownership of lighthouses was allowed until 1836, by which time the majority of English lighthouses were already under the full jurisdiction of Trinity House. <<

I think the scorekeeper needs to consult instant replay.

Posted by: on December 23, 2002 11:39 AM

In various classes/discussions I have bypassed the lighthouse example and often cited instead the thoroughly familiar experience of public street lighting as a good example of a public good satisfying the conditions of non-rivalrous consumption and, crucially, non-excludability, meaning non-payers cannot be prevented from enjoying the benefits.

So far, not even the most ardent libertarian has come up with a set of proposals as to how private bargaining between potential suppliers and consumers could lead to anything approaching a situation where the incremental costs of supply approximate to the the value of the incremental aggregate benefit to consumers from reduced traffic accidents, higher retail sales in shopping areas, lower crime rates, better ambience etc. Failing the challenge of how bargaining could work, I had long concluded that intervention by some public authority was an unavoidable necessity to ensure public street lighting but, hopefully as always, remain willing to entertain any contrary suggestions.

Incidentally, with a bit of latitude in interpretation, it can be argued that Adam Smith had a least a fuzzy idea of public goods, as in this passage:

"The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain." Wealth of Nations (1776) Book 5, Chapter 1, Part 3.

Posted by: Bob Briant on December 23, 2002 12:24 PM

Addendum: I haven't a copy to hand but as I recall George Bernard Shaw, in his: Intelligent Women's Guide to Socialism (1928), invokes lighthouses as an example of market failure vindicating his espousal of "socialism". We might perhaps safely conclude that Shaw and Coase were both guilty of over-generalisation.
BB

Posted by: on December 23, 2002 12:40 PM

"In various classes/discussions I have bypassed the lighthouse example and often cited instead the thoroughly familiar experience of public street lighting as a good example of a public good satisfying the conditions of non-rivalrous consumption and, crucially, non-excludability, meaning non-payers cannot be prevented from enjoying the benefits. "

Light pollution! Your so-called "benefits" are destroying the simple joys of backyard stargazing and, perhaps more importantly, degrading the ability of amateur astronomers to detect comets and asteroids which, after all, have greater than zero risk of impact with Earth and near-infinite costs to our economy, ecology, lifestyle, and political stability.

Now, in _my_ neighborhood, the custom is that homeowners install front porch "sensor" lights. Roughly 80% of the homes have such. When autos, pedestrians, or the rare stray dog wanders in front of the house -- voila! Light. But thirty seconds or so later, the natural condition of the
night (which is to say, darkness) is restored.

Now, the driving force of the custom is to allow the homeowner himself the benefit of walking from curbside parking to his door, (while fumbling for his house keys) in comfortable, safe, lighting. But his private expense in installing the sensorlights and paying the electric bill does provide much of the benefits of city-provided street-lighting, without shedding light on unoccupied streets, nor wasting valuable electricity in illuminating the hours between midnight and oh-dark-thirty. Plus, the homeowner changes his own porch lights (at most, installed stepladder high) at considerable savings over sending a unionized municipal electrical worker out in a hydraulic "cherry picker" lift truck to swap the bulbs atop a typical pole mounted street lamp.

In sum, I don't find this particular example of an economic principle particularly illuminating.

Posted by: melcher on December 23, 2002 01:40 PM

Melcher,
>In sum, I don't find this particular example of an economic principle particularly illuminating.

And does the traffic on heavily used main roads in urban areas also depend on whether householders choose to install front porch lights triggered by infra-red sensors?

Btw the UK has the lowest rate of traffic accident fatalities among OECD countries.

Posted by: Bob Briant on December 23, 2002 02:08 PM

Seems to me that the free market approach to
building lighthouses would be to build them
in the 'wrong' place, then collect and sell
what washes up on the beach after the shipwrecks.

Posted by: Jon Hendry on December 23, 2002 02:27 PM

>>Even without the Royal Authority establishing "light duties", lighthouse keepers could have bargained with port owners<<

Highly unconvincing. What's a port owner? Unless you establish a monopoly "port owner," the owner of the next wharf down has an incentive not to pay the lighthouse keeper.

Posted by: Brad DeLong on December 23, 2002 02:32 PM

>>Seems to me that the free market approach to
building lighthouses would be to build them
in the 'wrong' place, then collect and sell
what washes up on the beach after the shipwrecks.<<

*Snicker*

Posted by: Brad DeLong on December 23, 2002 02:33 PM

I dunno, I've spent time in some urban hellholes that would be improved by a collision with a very small celestial body, given 48 hours or so notice to clear the unfortunate inhabitants out. I say turn the lights on, lest those busybody astronomers give us several years warning, thereby allowing techniques to be developed to prevent this rather dramatic type of urban renewal!

Posted by: Will Allen on December 23, 2002 04:23 PM

I am not anywhere near brilliant enough to figure how someone in the private sector could possibly earn a profit on building and maintaining a lighthouse. It seems patently obvious that this is a responsibility best left to the government. The same holds true for most highways and bridges. I have never understood the free market absolutists who get bent out of shape in these particular instances. The evolution of the computer was also dramatically assisted by the government’s investment in military technology. My guess is that the private sector might have never started the ball rolling.

The government should always be our last resort. But once you decide that the private sector is unable to respond to the challenge---take a chill pill and simply do what you can to devise adequate check and balance procedures to monitor the political entity’s activities. Alas, do you psychologically and existentially yearn for doctrinally pure rules to live by? If so, please convert to some sort of religion and stay out of politics.

Posted by: David Thomson on December 23, 2002 05:18 PM

If you're interested in people who don't quite get their supporting material 100% accurate, though they manage to get an illuminating simplification, try Garret Hardin's wrong understanding of how English Commons actually worked in real life; a real case of "fruitful error". Jim Blair was kind enough to post some material I sent him on the topic, at the bottom of his page on the "Tragedy of the Commons" issue at http://www.geocities.com/CapitolHill/4834/common.txt. Of course, you shouldn't quote my comments as solid references either, but treat them as criticisms and starting points providing further leads - but you knew that.

Posted by: P.M.Lawrence on December 23, 2002 07:11 PM

Even without the Royal Authority establishing "light duties", lighthouse keepers could have bargained with port owners


What if the lighthouse isn't for the purpose of guiding the ship into the port, but for the purpose of pointing it away from the rocks? Who pays then?


(Davies makes this distinction, ignored by the laissez-faire side in the lighthouse controversy).

Posted by: on December 23, 2002 08:38 PM

>>Seems to me that the free market approach to
building lighthouses would be to build them
in the 'wrong' place, then collect and sell
what washes up on the beach after the shipwrecks.<<

> *Snicker* <

Nah, then the ship owners would become annoyed and the lighthouse owner wouldn't be able to collect any more fees from them to to pay the mortgage on the lighthouse -- which had to be fully built, completed, working and of course financed before the first ship paid the first two pence in fees to it.

OTOH, one would think that the natural action of a sanctioned monopoly would be to choose *not* to build any more lighthouses and to focus on maximum rent extraction from those it already had -- which is exactly what happened in historical fact.

Trinity House refused to build any more lighthouses after 1610, which motivated the private providers to step in and work their way around the monopoly to provide the supply TH refused to supply, which they did.

I'm always kind of perplexed by people who damn private sector monopolies, like Microsoft, for jacking up prices, stifling innovation and supply, etc. -- but who for some reason don't think government sanctioned monopolists have the same incentives to do the very same thing, combined with a lot more *power* to actually do it because of their legal protections.

I mean, if Bill got a charter from the government naming Microsoft as the one and only legal provider of software, would MS suddenly become a benevolent protector of consumer interests? To whom we'd all say "thanks" for saving us from have to deal any more with all those greedy, cutthroat, cheating, competing capitalists who formerly were about?

Posted by: Jim Glass on December 23, 2002 09:36 PM

>> What if the lighthouse isn't for the purpose of guiding the ship into the port, but for the purpose of pointing it away from the rocks? Who pays then?

(Davies makes this distinction, ignored by the laissez-faire side in the lighthouse controversy).<<

It's not at all ignored by Coase, who addressed it specifically even in the Reason interview:

" [Samuelson] says Coase is wrong; he doesn't overcome the free rider problem.

" Who are the free riders? The foreign ships going past the British coast which do not call at a British port. Using Samuelson's approach, what do you do? Do you ask the foreign governments to give you a subsidy? Do you tax people in Britain because the foreign ships are getting help without paying for it? What do you do?"

So that argument cuts both ways -- Samuelson didn't have an answer either.

Of course, there is a practical answer for some cases: Presumably those foreign ships passing by a point where there is no harbor to come into and be charged will want to keep passing by and not wind up on the rocks. So their owners will have an incentive to say, "Hey, will somebody build a lighthouse there? We'll help pay for it", which would be a market answer. I don't know what the governmental intervention answer would be. The locals out of the goodness of their hearts pay the whole cost for the foreigners, maybe?

Posted by: Jim Glass on December 23, 2002 09:50 PM

“So their owners will have an incentive to say, "Hey, will somebody build a lighthouse there? We'll help pay for it", which would be a market answer.”

Who is this we who will volunteer “to pay for it?” Are you also hinting that our paved highways could have been built by the private sector? I’m sorry but I don’t perceive the feasibility of this option. The dilemma of fairness and the prevention of free riding is inherently unavoidable. The market is the answer in most cases, but the threat of Armageddon is not necessarily upon us if occasionally we decide to have government handle a particular need.

I can, however, offer a possible compromise. The government might build the lighthouses and then bid out their management to private sector competitors every few years.

Posted by: David Thomson on December 23, 2002 10:21 PM

>>Even without the Royal Authority establishing "light duties", lighthouse keepers could have bargained with port owners<<

>Highly unconvincing. What's a port owner? Unless you establish a monopoly "port owner," the owner of the next wharf down has an incentive not to pay the lighthouse keeper.<

Well, if one believes history as reported by Coase, the ship owners, shippers and merchants in fact did negotiate the fees they were willing to pay for the lighthouse and petitioned the Crown on behalf of the prospective lighthouse builder, saying they were willing to pay them for the service.

I don't know why history should be less convincing than theory -- which is sort of the main issue of the Coase/Samuelson dispute.

Posted by: Jim Glass on December 23, 2002 10:46 PM

Daniel Davies wrote:

>> Jim Glass, a regular inhabitant of various comments sections who has done an admirable job in keeping me honest over the last week. ...<<

First let me say: Gosh you are a good sport. On usenet I've had to put on my asbestos armor and fight World War 6 with people with whom I've had much smaller differences. So Good Tidings to You and Yours, as the season would have it...

That said, let me step in on behalf of poor defenseless Coase, try to keep things honest regarding a couple other points, and see if on the old man's behalf I can't get the score up to 393 to 2 or 3. (To save Prof. Delong's bandwidth I'll leave it at that.)

>> The main thrust of Coase's article was against comments made by Mill, Pigou and others, but he also paused to have a crack at Samuelson...<<

Nope, that's backwards. Coase was sympathetic to Mill & Co., saying they just used the lighthouse example to illustrate a type of pricing problem without having any objection regarding *actually* charging for lighthouses if it could be worked out.

Coase's thrust was at Sameulson, writing "Samuelson's position is quite different from that of Mill, Sidgwick and Pigou" -- being not just that private firms *couldn't* provide lighthouse services, but also that even if they *could* "they should not be be allowed to so (which also presumably calls for government action)".

>>a system under which the government of the day gives you the authority to demand a payment from every ship that enters a port, and which states that failure to recognise this authority is treason (at the time, punishable by death), does not really look to me to be very much like a free market exchange. In fact, in giving the producer of a product the authority to demand on pain of death or imprisonment that everyone in a particular market has to buy their product, would seem to me to be very much more government involvement indeed, than the current rather light regulation of the housing market<<

I know you are at a disadvantage for not having read the article you are criticizing, but you've missed the point that the private lighthouse owners obtained the right to collect tolls after the shippers and merchants *did* negotiate the fees they were willing to pay, and filed petitions with the King saying they desired to pay the specified tolls for the service.

So the King was hardly empowering his buddies as "lighthouse pirates" who threatened passing ships with "pay all or die!" (Although Coase pointed out that abuses of favoritism could occur -- just as with Trinity House).

You know, even in our day voluntary transactions are enforced by stiff criminal sanctions. If I sell you my house then reneg on the deal and refuse to move out, you can have the police throw me in jail for criminal tresspass. (Oh, I may not be executed for it, but times change.)

>> And there are numerous accounts of "rent seeking" behaviour in lighthouses, whereby lighthouse entrepreneurs with good political connections sought to build unnecessary lighthouses in anticipation of the stream of light duties they would be allowed to extract. <<

Sure. But remember that the alternative was *no* new lighthouses because Trinity House was refusing to build them, due to rent seeking behavior of its own. Monopolies engage in rent seeking too, don't they? And government sanctioned monopolies have rather greater opportunities for rent seeking than anyone else, don't they?

When considering policy we have to compare actual real-world alternatives -- and not make the highly illogical jump "there's a problem with A, so B must be better!"

Coase addressed this too in the Reason interview:

"My approach is to compare the alternatives. People like Samuelson like to set up a perfect world and say that the market does not bring us to this point and imply that the government should do something. They stop their analysis at that point."

As a public service* I've excerpted the history section of the Coase article at http://www.mindspring.com/~jimglass/lighthouses.htm

You may notice some rent seeking behavior on Trinity House's side of the ledger.

* But I will say that for the price, _The Firm The Market and the Law_ is the best buy in my econ library: How to win a Nobel in econ with just six essays in only 200 pages of plain English, using factual observation, logic, a sense of humor and *no math at all*. Paperback too.

Posted by: Jim Glass on December 23, 2002 11:24 PM

Jim wrote:

>>So their owners will have an incentive to say, "Hey, will somebody build a lighthouse there? We'll help pay for it",<<

and

>>Well, if one believes history as reported by Coase, the ship owners, shippers and merchants in fact did negotiate the fees they were willing to pay for the lighthouse and petitioned the Crown on behalf of the prospective lighthouse builder, saying they were willing to pay them for the service. <<

This, I think, is falsified by the case of Sir John Clayton, mentioned, but (unaccountably) not linked in my piece -- it's easy to find from the index.

Clayton did exactly what you suggested and submitted a petition to be allowed to build five lighthouses. He supported his petition with 500 signatures of shipowners and merchants who had said that they would voluntarily contribute.

Guess what? Samuelson's free-rider problem occurred. Because of the seemingly huge support for the lighthouses, the Privy Council did not include a compulsory levy order, and as a result of this, Clayton could only afford to light two of his five lighthouses. The Farne Islands, Flamborough Head and Foulness lighthouses, displayed on Admiralty charts of the period as "lighthouses that hath no lights", seem to me to be a very good example of a failure of market solutions to the lighthouse problem.

By the way, on the point of:

>>Seems to me that the free market approach to
building lighthouses would be to build them
in the 'wrong' place, then collect and sell
what washes up on the beach after the shipwrecks<<

Check out the following link:

http://www.btinternet.com/~k.trethewey/wrecker.html

on the somewhat murky career of Sir John Kiligrew, owner of the Lizard lighthouse. Also interesting to note that, once more, Kiligrew found it difficult to get voluntary contributions out of the shipowners, though I am not sure whether or not Coase would have approved of his solution of sending smugglers and wreckers in to do his debt collection. But the interesting point is that there is good reason to suspect that Kiligrew occasionally turned the LIzard light off for exactly that reason.

On the issue of Trinity House's "refusal" to build lighthouses after 1610, in the first place I can find at least one reference to their building a light at Winterton in 1617, and whatlooks like a reference to their stepping up construction after 1685. In actual fact, the observation that TH were remiss in building lighthouses in the seventeenth century appears to be a matter of a different kind of political failure; lighthouse patents seem to have been handed out like candy to royal favourites by a king who was looking for a cut of the revenues.

Posted by: dsquared on December 23, 2002 11:29 PM

Brad DeLong objects:

>> << Even without the Royal Authority establishing "light duties", lighthouse keepers could have bargained with port owners >>

>> Highly unconvincing. What's a port owner? Unless you establish a monopoly "port owner," the owner of the next wharf down has an incentive not to pay the lighthouse keeper.<<

I think I'll start calling this one, The Fable of the Quays!

An economist by the name of Steven Cheung, at the Univ. of Washington, looked into this argument as regards the supposed free-riding problem between bee keepers and apple growers in Washington state. He found, as Coase did, that things are a little different away from the blackboard; the bee-keepers and apple growers did contract with each other. They used informal methods of keeping everyone playing fair.

Funny thing is, government completely ignored his work and expanded "honey subsidies" dramatically during the Reagan Administration.


Posted by: Patrick R. Sullivan on December 24, 2002 08:16 AM

"...lighthouse patents seem to have been handed out like candy to royal favourites by a king who was looking for a cut of the revenues."

The Libertarian extremists are more often than not right about the threat of too much government. It is, though, unfortunate that they sometimes take their argument a few steps too far. There is simply no hope for civilization without taxes. Great Britain’s democracy apparently was too weak to do anything about its mandatory need for lighthouses. My guess is that parliament had little authority to vote on such issues of importance. Thus, it was left to the king to dole out favors to his buddies. One wonders how many sailors died because of this sad situation.

Posted by: David Thomson on December 24, 2002 08:19 AM

Are lighthouses public goods?

We know that they are not _pure_ public goods, and I would venture to say that they are a mixture of club and public. While they are undeniably nonrivalrous and nonexcludable, their services are also directly irrelevant to most of the population. And you don't need to exlude people who don't benefit.

Granted, the general population receives external economies from safer and increased shipping, but the "club" marine interests have far greater interest in the erection and maintenance of lighthouses.

I don't know of any theory that determines an "optimal" provision of such goods, and it's not clear to me whether "markets"--private providers highly integrated with government institutions--will under-allocate or over-allocate lighthouses.

Posted by: Kevin Brancato on December 24, 2002 11:10 AM

Lighthouse are most definitely “pure_ public goods.” It is absurd to argue that “their services are also directly irrelevant to most of the population.” The fact that “the "club" marine interests have far greater interest in the erection and maintenance of lighthouses” does not even minimally detract from the fact the general society benefits from the resulting trade. Great Britain’s overall wealth would not have dramatically increased during this period without these lighthouses.

Posted by: David Thomson on December 24, 2002 12:20 PM

Lighthouses are most definitely NOT pure public goods.

Samuleson's pure public good--like his pure private good--is an ideal construction, not to be found in reality. To be pure public, all units of a good must be consumed by everyone in the population, which is obviously not the case with lighthouses.

I certainly agree that general society benefits from lighthouses--in multiple ways. Cheap and safe shipping and tranportation are crucial to trade and economic development. Specific lighthouses have undeniable benefits to specific shippers, and hence to the consumers of the services of those shippers. However, practically everyone uses at least one lighthouse as an input to production somewhere down the line.

The question for policy is how to make sure lighthouses are allocated when and where they should be. How does the theory of public goods help us do this?

Posted by: Kevin Brancato on December 25, 2002 08:50 AM

“Samuleson's pure public good--like his pure private good--is an ideal construction, not to be found in reality. To be pure public, all units of a good must be consumed by everyone in the population, which is obviously not the case with lighthouses.”

I guess I define a pure public good in an entirely different manner than Samuleson. Lighthouses benefit everyone at least indirectly. To my mind, that is so obvious as to be non debatable. An improving economy inevitably lifts all boats.

“The question for policy is how to make sure lighthouses are allocated when and where they should be. How does the theory of public goods help us do this?”

Now we are discussing the very reason why I regret that certain functions are best handled by the public sector. Government is innately less competent and far more wasteful than the private sector. Cynically, I am very well aware that politicians are likely to build a number of lighthouses where they are not needed. In an utopia, our elected officials would only cast their votes for legislation that would benefit the greater good. Alas, we do not live in a perfect world and politicians often tend to vote for what’s best for their immediate constituency. There is only one real answer to your question. We must try and elect leaders who are fair and honest. No system, however brilliantly devised, can overcome the immorality of its members.

Posted by: David Thomson on December 25, 2002 11:02 AM

Setting aside the case of lighthouses, I must take issue with David's implication that roads and bridges are also public goods. They are not. Both are excludable (ever heard of a toll road or toll bridge?), and both are potentially rivalrous (as anyone who drives in Los Angeles can attest). Thus, they meet neither condition for a public good.

This should not be taken to mean that their production and provision are unproblematic. If roads were treated as pure "fee simple" private property of their owners, for instance, then the owner of a single long road could prevent anyone from crossing it without paying a huge fee. To resolve this problem, rights of exclusion would have to be tempered by easements and rights of way. (This does not offend my libertarian sensibilities, as it just reflects a different institutional arrangement of property rights.) But the fact that roads and bridges pose some interesting problems does not make them public goods. The problems they face are quite different from those faced by lighthouses.

Posted by: Glen Whitman on December 25, 2002 11:13 PM

Is the effect of voting and interest groups completely ignored in these discussions? A well-funded interest group tends to keep the king from soaking them for extra lighthouses, the public in general has a slight bias to transferring lighthouse revenue to the general treasury, etc., etc.....

Posted by: Jason McCullough on December 27, 2002 02:21 PM

It's frustrating to still see an argument at the end of this comments page as to whether lighthouses are pure public goods (meaning nonrival and nonexcludable). Davies' critical insight, IMHO, is that '"Lighthouses" don't form a homogeneous class of capital assets.'

http://www.dankohn.com/archives/000280.html
As I say in the above blog post (note the specific excerpts there), 'We should all (even Coase and Samuelson) be able to agree that the textbooks should be updated to say "hazard-avoidance lighthouses are pure public goods".'

Posted by: Dan Kohn on December 28, 2002 05:22 PM

>> Is the effect of voting and interest groups completely ignored in these discussions? A well-funded interest group tends to keep the king from soaking them for extra lighthouses, the public in general has a slight bias to transferring lighthouse revenue to the general treasury, etc., etc.....<<

Go with that, Jason. Tell us more about the electorate's control of, say, Henry VIII.

Posted by: Patrick R. Sullivan on December 29, 2002 10:50 AM

Perhaps Dan Kohn should take it up with Hal Varian:

http://firstmonday.dk/issues/issue2/different/#SECTION0008

>> Lighthouses This example is rather interesting from a historial perspective. Economists have often used lighthouses as an example of a good that would be best provided as a public utility due to the difficulty of recovering costs. For our purposes, their interesting feature is that the cost of servicing incremental users is negligable. As Samuelson [1964] puts it "... it costs society zero extra costs to let one extra ship use the service; hence any ships discouraged from those waters ... will represent a social economic loss ... ." Coase [1974] examined historial record and found that privately financed lighthouses were provided in England for hundreds of years. Even more remarkably, the pricing arrangement they used was quite efficient: they charged on a sliding scale based on the number of voyages a trip took per year. After 6-10 trips per year, the incremental price for the services of the lighthouse was zero, just as efficiency requires.<<

Posted by: Patrick R. Sullivan on December 29, 2002 10:57 AM

Go with that, Jason. Tell us more about the electorate's control of, say, Henry VIII.

Dictators and kings have the same political pressures as democratic leaders, albeit much lessened; interest group politics should be stronger for kings, if anything. I seem to remember a few English civil wars with roots in political disagreement, too.

Posted by: Jason McCullough on December 29, 2002 02:50 PM

>> Dictators and kings have the same political pressures as democratic leaders, albeit much lessened; <<

You got this from James Buchanan?

>> interest group politics should be stronger for kings, if anything. I seem to remember a few English civil wars with roots in political disagreement, too. <<

Interest groups derive their power (vis a vis the general electorate) from their greater cost/benefit ratio for specific knowledge. Kings would trump interest groups in this regard.

But do keep posting, the comic relief is worth it.

Posted by: Patrick R. Sullivan on December 29, 2002 05:12 PM

Patrick, please reread Daniel Davies's whole post. It updates Coase, Samuelson, and Varian with some information that none of them had. Again, the key idea (IMHO) is that: '"Lighthouses" don't form a homogeneous class of capital assets.' Varian's awesome, but that doesn't mean that he had access to all the relevant facts in his previous piece. As I quote in my piece, either the lighthouses weren't "come-to-port" versus "hazard-avoidance" version, or the King was backing the supposedly "private enterprise".

Posted by: Dan Kohn on December 29, 2002 09:00 PM

>>Go with that, Jason. Tell us more about the electorate's control of, say, Henry VIII.<<

Why not tell us something about the electorate's control of, say, Bad King John?

I substantially agree with Dan Kohn and thank him for his kind words ... I'd also note that Varian is talking about the "zero marginal cost" property of lighthouses, while the majority of my article deals with the non-excludability. But I wouldn't expect Our Patrick to pay attention to such niceties when there are chunks of text on the Internet to be copied and pasted because they look like they might agree with him.

Posted by: dsquared on December 30, 2002 05:22 AM

The fun I've missed over Christmas...

You know when the comments on an analytical-issue-post go past about 10 in number, the analytical issue is getting blurred. So here's the recap, mostly for my own catch-up benefit. (I wonder who else is still reading?)

Question 1. Are lighthouses pure public goods?

Answer: To the extent they satisfy non-rivalry and non-excludability, they are as good an example of a "pure public good" as I can think of. Quibbling over this issue seems rather pointless.

I think the quibbling regarding the first question is really motivated by disagreements on the second, and distinct question, viz:

Question 2. Do lighthouses represent examples of "market failure"?
a) with respect to first-best Pareto-efficiency criteria? (Samuelson)
b) with respect to feasible institutional alternatives? (Coase)
Thus: Is government provision of "lighthouse services" essential?

So far we've had the is-it-that-the-government-can-provide-quasi-property-rights-and-let-the-parties-bargain-or-is-the-government-effectively-collecting-user-fees-but-outsourcing-lighthouse-supply debate, we've had rent-seeking, we've gotten distracted by what-is-a-public-good-anyway-and-are-lighthouses-a-good-example, and now we're into public choice issues.

Did I miss anything?

Posted by: Michael Harris on December 30, 2002 05:54 AM

I would first suggest that Dan Kohn re-read Davies piece, and take note of his: "I haven’t read the full Coase paper on lighthouses in economic history, because it isn’t on the Web and I haven’t had time to get hold of the book. "

How Davies can "update" Coase without reading him is a mystery. Davies doesn't even seem to realize that "The Lighthouse in Economics" is not a book, but an article in the Journal of Law and Economics.

As to this nonsense about " 'Lighthouses' don't form a homogeneous class of capital assets", Coase clearly dealt with this distinction when he wrote: "Who are the free riders? The foreign ships going past the British coast which do not call at a British port. Using Samuelson's approach, what do you do? Do you ask the foreign governments to give you a subsidy? Do you tax people in Britain because the foreign ships are getting help without paying for it? What do you do?"

Posted by: Patrick R. Sullivan on December 30, 2002 07:41 AM

The ever flexible dsquared, now writes:

>> Varian is talking about the "zero marginal cost" property of lighthouses, while the majority of my article deals with the non-excludability. <<

In fact, he wrote:

>>...he [Samuelson] was just trying to hammer home the concept of marginal cost pricing; the marginal cost to a lighthouse of shining on another ship is zero, so the marginal cost to a ship of being shone on ought to be zero in an optimal solution.<<

Does dsquared also not read himself?

Posted by: Patrick R. Sullivan on December 30, 2002 07:48 AM

This is a very late contribution, since I was led to this page by a
serendipitous Google search just yesterday. One thing that struck me
is that several of the posters (including Daniel Davies, the author
of the piece under discussion) had not actually read the Coase paper.
I have a (hard) copy, and offer to send it to Daniel Davies and any of
the other people who have posted comments on this page. Just send me
your snail mail addresses.

Overall, Daniel Davies makes very good points. The Coase paper accuses
Mill, Sidgwick, Pigou, and Samuelson of being unclear, but it itself is
occasionally unclear and even seriously misleading.

On the Samuelson point of the optimal charge for lighthouse service,
Coase is pretty clear. Samuelson is basically saying that even if one
could conveniently collect tolls (something he doubts), one should
not, because the marginal cost of protecting an extra ship is zero,
and so for optimal economic outcome, the price should also be zero.
Coase argues against this, on that basis that:
(i) central government funding of lighthouses would subject this service
to various political whims and remove it from the influence of the
shipping industry (which, through various advisory bodies, helped set
the rates and decide on priorities), thus making it less efficient

and

(ii) the lighthouse tolls were such a small fraction of the transportation
costs that their level did not affect the volume of shipping, thus
weakening the argument for making marginal price equal to marginal cost

One can argue these points, but at least this part is clear. Where Coase
is misleading is in discussions of how the lighthouse fees were levied.
He refers several times to charging all ships benefiting from a
lighthouse, and mentions that sometimes the fees were collected by
Customs officials, which sort of implies that the coercive power of the
state was involved. (Have you ever heard of Customs officers politely
asking travelers to please voluntarily contribute 10% of the value of
their goods, out of the goodness of their hearts, to the collection box?)
However, Coase also constantly talks of private enterprise and voluntary
action. As an example of the confusion that ensues, let me cite the
third paragraph from the end, which seems to be a good summary of Coase's
main argument:

The account in this paper of the British system does little more than
reveal some of the possibilities. The early history shows that, contrary
to the belief of many economists, a lighthouse service can be provided by
private enterprise. In those days, shipowners and shippers could petition
the Crown to allow a private individual to construct a lighthouse and to
levy a (specified) toll on ships benefiting from it. The lighthouses
were built, operated, financed, and owned by private individuals, who
could sell a lighthouse or dispose of it by bequest. The role of the
government was limited to the establishment and enforcement of property
rights in the lighthouse. The charges were collected at the ports by
agents for the lighthouses. The problem of enforcement was no different
for them than for other suppliers of goods and services to the shipowner.
The property rights were unusual only in that they stipulated the price
that could be charged.

Now let's look at this sentence by sentence, ignoring the first and
last ones:

2nd sentence ("The early history ..."): What does it mean for a service
to be "provided by private enterprise"? There are U.S. Navy supply
ships that are owned by private enterprise and operated by civilian crews
employed by private companies. The money comes from taxes, and the Navy
has full control of the ships' operation. Should we conclude from this
that military protection can be "provided by private enterprise"?
3rd sentence ("In those days ..."): Yes, but this is more than a little
misleading, since usually it was a single promoter or a small group that
decided there was money to be made, and collected supporting petitions.

4th sentence ("The lighthouses ..."): Yes, except that in many (possibly
most) cases the charter from the government was for a limited period.

5th sentence ("The role of the government ..."): This is seriously
misleading. The property rights were not in "the lighthouse" itself,
but in the waterways around it. The owner got limited control of the
sea near the lighthouse.

Also, this was not a unilateral grant. The charter ("patent" was
the term used in the early days) holder had an obligation to provide
lighthouse service.

6th sentence ("The charges were collected ..."): But this avoids the
central issue, namely how were those charges collected? By (a) asking
politely for a voluntary contribution, (b) pointing to a contract entered
into voluntarily some time earlier, and asking for its fulfillment, or
(c) by demanding payment from every ship entering harbor, under threat
of fines and jail? History says that (c) was the dominant model.

7th sentence ("The problem of enforcement ..."): This is extremely
questionable. A baker could offer his hard-baked biscuits at various
prices and in various quantities, and the ship master could choose.
On the other hand, the master could not say "I am only going to sail in
broad daylight, and in fair weather, so I don't need your lighthouse,
so go away and get your money from others." He had to pay the fees.

Thus my general conclusion is that Coase simply has not made a case that
lighthouses could be provided by private enterprise. They might be,
but his arguments do not hold water. (The bee keeper case mentioned
earlier on this page is a different story. It is much more solid,
but then the circumstances are very different, in that the costs and
benefits of having a beehive are localized, which makes it easier for
voluntary contracts to be concluded.)

What is perhaps most astonishing about this affair is that it took so
long for anybody to question Coase's thesis. Just about any serious
economic historian that read his paper should have been able to spot
the mistakes. The pre-modern history of England (and other countries as
well) is full of examples such as tax farming, or having the Post Office
run by a private contractor in return for a fixed fee to the government.
English river navigation projects in particular are almost an exact
analogy to the lighthouses. Individuals or groups would undertake to
dredge particular stretches of river, say, investing their own money.
In return they could collect fees from all boats passing that stretch of
the river, fees that were set by their charters ("patents"). This was
a common practice, and well-known to historians. Thus apparently few
people with knowledge of history had read Coase's paper or were aware
of his thesis.

(As an aside, the reason I am writing this up is that I am doing a major
study of 19th century railroad pricing, with applications to privacy,
price discrimination, and general evolution of ecommerce. In trying to
understand what happened on railroads, I was led to investigate pricing
of services such as canals, turnpikes, river navigation projects, and
sea tolls.)


Posted by: Andrew Odlyzko on January 4, 2003 05:41 AM

“What is perhaps most astonishing about this affair is that it took so long for anybody to question Coase's thesis. Just about any serious economic historian that read his paper should have been able to spot the mistakes.”

Coase’s thesis indeed sounds highly dubious at first hearing. I say this as someone who probably agrees with him in most instances. Why did his so-called academic peers fail to take him to task? Moreover, how many other times do they fail to do their duty?

Many ultra-Libertarians are fearful that the true faith of Capitalism will be destroyed if ever it is conceded that some exceptions to the general rule are inevitable. This is a silly and immature attitude.

Posted by: David Thomson on January 5, 2003 09:50 AM

About 10 years ago I wrote a review of a book of essays on "private provision of public goods" that included a fairly extensive critique of Coases's paper. I've posted the pre-print at http://www.sims.berkeley.edu/~hal/public.pdf along with a reference to the published piece.

I raise several of the objections to Coase mentioned here, along with a couple of ones that haven't been mentioned. One tie-in to the price discrimination thread: Coase claims that the actual price scheme used was one that charged only for the first n voyages in a season. This means that the marginal price paid by a frequent voyager was zero---exactly what Samuelson said was required for efficiency.

As you will see from my review, I'm sceptical of Cheung et al as well. They've done a useful service in bringing up these examples, but I don't think they contradict conventional theory --- at least if it is properly understood.

Posted by: Hal Varian on January 5, 2003 01:15 PM
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