Economists have long used the lighthouse as a textbook example of a public good: a service whose light cannot be withheld from any passing ship, so that no captain has reason to pay for it voluntarily. In 1974, however, Ronald Coase challenged this tidy story. Examining the history of British lighthouses, he found that for a long period many were built and operated by private owners, who were compensated through fees collected from ships when they reached port. The lighthouse, he argued, had been supplied by the market after all, and economists had been careless in reaching for a convenient example without checking the facts.
Coase's account has since been qualified. Critics note that the private lighthouse owners could not have operated without a royal grant of the right to levy fees, and that those fees were enforced by customs officers. The market, in other words, worked only because the state created and protected the conditions in which payment could be collected. Both sides, then, have something right. Coase showed that a service which looks impossible to charge for can sometimes be financed privately; his critics showed that such arrangements often rest on legal machinery that is easy to overlook. The lasting lesson of the episode may be methodological: theories illustrated by a single example are only as sound as the historical evidence behind that example.