Voluntary Contributions

Those entrepreneurs willing to risk their money on lighthouse construction would arrange for the presentation of a petition to the Crown signed by shippers, merchants, and local administrators, requesting the issue of a patent for a lighthouse. In England, however, not all patents included a clause that the lighthouse keeper had the right to demand light dues from shippers. In some cases, the entrepreneur promised to erect and maintain the lighthouse with the help of voluntary contributions only. For example, in 1619 John Killigrew obtained a patent from James I to build a lighthouse and he was given permission to receive any voluntary contributions for its upkeep.^{Footnote 29} A year later, in 1620, when the tower was completed, Killigrew began to lament that no voluntary contributions were coming in. Claiming that he had spent £500 on the lighthouse but “yet no return,” he requested the right to levy compulsory dues from shippers.^{Footnote 30} In September 1621, the total amount received from voluntary contributions for the Lizard lighthouse amounted to only £18.^{Footnote 31} Despite some attempts to persuade the authorities that his lighthouse was a help to ship owners, Trinity House opposed the imposition of compulsory dues unless the Dutch were also willing to contribute to its costs; Killigrew was not allowed to raise light dues,^{Footnote 32} and he extinguished his light in 1624.^{Footnote 33} This demonstrates that, in this early experiment, voluntary light dues were not sufficient to finance the building of lighthouses. A further example of failed attempts to receive payments on a voluntary basis is the request from Sir John Clayton and George Blake to build a double lighthouse at St. Nicholas’ Gatt and lighthouses at Corton, Cromer, Flamborough Head, and the Farne Islands. Clayton (Blake died soon after the request) was authorized to receive payment by way of voluntary contributions. The patent lasted for sixty years at a yearly rent to the Crown of £20.^{Footnote 34} Clayton and Blake had spent the huge amount of £3,000 to build the lighthouses, but soon ran into financial difficulties as the said recompense was not paid according to expectations. Many users failed to pay because there was no obligation to do so, and the rates and proportions of profits to be received for each lighthouse were not mentioned in the original patent.^{Footnote 35} Only the lighthouse at Corton was lit, but the light was extinguished after three years when Clayton realized that he had only received £60. A system based on voluntary contributions thus led to a situation where no lighthouses were built.

Government Provision

The most important public institution that governed English lighthouse construction and the accompanying dues collection was Trinity House of Deptford Strond, a charitable organization founded in 1514 that had evolved out of a medieval Guild of Mariners. The legal status of Trinity House was, according to Taylor, a private corporation that “performed a public role which would otherwise have had to be performed by a central government agency.”^{Footnote 36} Regulating pilotage and providing aid to old seamen and their families were some of its chief early duties; later responsibility for seamarks was vested in the corporation. During the first half of the sixteenth century, it was the Lord High Admiral’s exclusive responsibility to supply buoys, regulate beacons and seamarks, and collect funds for the maintenance of lighthouses. In 1566, these rights of supervision, maintenance, and collection of dues were shared with Trinity House and, after 1594, all of the Lord High Admiral’s rights were gradually transferred to Trinity House. The charter of 1514, granted by Henry VIII, gave Trinity House the right to regulate pilotage and, in 1566, it gained the right to provide and regulate seamarks.^{Footnote 37} Trinity House first built its own lighthouses early in the seventeenth century (Caister in c. 1600 and Lowestoft in 1609). Trinity House was reluctant to propose lighthouses and objected to many, although it did occasionally approve some constructions.

The corporation was thus involved in several conflicts regarding the right to build lighthouses; for example, it opposed the construction of lighthouses at North and South Forelands in 1634. As was usually the case, shipmasters had petitioned the king to appoint someone to build a lighthouse in order to prevent shipwrecks.^{Footnote 38} When the Privy Council gave authority to John Meldrum to build the lighthouse, Trinity House offered to build it instead, but did not obtain approval.^{Footnote 39} The lighthouse was lit at Spurn Point in about 1672 without Trinity House voicing any opposition, but Trinity House opposed the ambitious project of building five lighthouses at four different sites by John Clayton in 1675.^{Footnote 40} In 1791, Trinity House openly explained its opposition to the construction of lighthouses: it was not its policy to propose the building of a lighthouse until shipping interests demanded it.^{Footnote 41} The reason for this probably related to Trinity House’s dual duties, being responsible for building lighthouses (which would increase the costs for shipping) and having a role as a charitable organization for mariners and their families. Increased costs for shipping would decrease the amount of money available for charitable purposes. As Holmstrom and Milgrom emphasize in their seminal article on “multi-tasking” in complex organizations, incentive problems must be analyzed in totality.^{Footnote 42} Since Trinity House was responsible for pension payments, it was also averse to risk when embarking on lighthouse projects. When incomes from the lighthouses increased during the seventeenth century, it adopted a more positive attitude toward building and financing lighthouses. It was in the context of carrying out its charitable duties toward “decayed masters and seamen” that led Trinity House to oppose any reductions in light dues in the 1850s.^{Footnote 43}

Private Provision

Stevenson’s account of the elements of the English patents (awarded to private entrepreneurs) illustrates the core principles of delegating the lighthouse operation to private parties. Van Zandt and Bertrand build their account on Stevenson’s, and I give a short recapitulation here. Alongside Trinity House, there also existed a number of private lighthouses. The first recorded successful proposal for a private lighthouse in seventeenth-century England, that is, one not constructed by Trinity House, was probably put forward in 1615 by Edward Howard and associates, who wanted to build a lighthouse at Dungeness. The formulations in the patent of 1566 (that Trinity House had the sole authority to erect seamarks) could imply that Trinity House had a monopoly on building lighthouses. The king in 1615, James I, however, did not recognize Trinity House’s exclusive rights to build lighthouses.^{Footnote 44} Coase’s main argument, initially put forward by G. G. Harris in his detailed study of the early years of Trinity House, was that individuals embarked on lighthouse construction for their own financial gain, while Trinity House did not do so.^{Footnote 45} According to Coase, Trinity House was the rightful owner of the right to build lighthouses. Failure to do so illustrates Coase’s point relating to governmental failure. Based on previous work by Harris, Coase concluded that “with the completion of Lowestoft, [Trinity House] rested content and did no more. . . . Failure to respond to demands . . . shook confidence in the corporation; since there was a prospect of profit, it was tantamount to inviting private speculators to intervene. They soon did so.”^{Footnote 46} The infringement of Trinity House patents is of great importance in understanding how Coase came to the conclusion that “private” ownership of lighthouses facilitated a more efficient response to market demands than was the case for state ownership. Coase emphasized that Trinity House did not erect any lighthouses in 1610 and 1675, and that at least ten lighthouses were built by private individuals. By 1700, Trinity House had become less hostile to the erection of lighthouses because a new strategy had been adopted, which would also be of benefit to them. Applying for a grant and then leasing the rights to someone else for a fixed rent meant that some money obtained from lighthouse services reached the corporation.^{Footnote 47}

English patents were characterized by several elements. The entrepreneur was granted the exclusive right to build and maintain a lighthouse in a specific area for a number of years;^{Footnote 48} in exchange for this right, the entrepreneur paid a fixed annual rent and was entitled to keep the residual amount.^{Footnote 49} Patents usually stipulated that competitors were forbidden to erect other lighthouses in the vicinity; the patents usually ran for a long period, for more than fifty years, although a few ran for perpetuity; if a private party would not renew a patent, it could be sold to another private party, or Trinity House might take it over.^{Footnote 50} The amount of money that a lighthouse operator was entitled to charge ships that passed by the lighthouse was also specified in the patent, which the following examples show. The first patent, issued in c. 1616, for Dungeness ran for fifty years;^{Footnote 51} the St. Nicholas Gatt patent, in 1675, ran for sixty years for a yearly rent of £20;^{Footnote 52} the Harwich patent, in 1665, ran for sixty-one years for a rent of £5; the Flatholm patent, in 1737, ran for ninety-nine years with a rent of £5 for fifty years and £10 thereafter.^{Footnote 53} Trinity House leased the Smalls lighthouse to a private individual in 1778 for ninety-nine years, and leased the Longships lighthouse to a private individual in 1795 for fifty years for an annual rent of £100.^{Footnote 54} Mumbles lighthouse was leased from Trinity House in 1794 for ninety-nine years at a yearly rental of £5.^{Footnote 55} The leases of Smalls and Longships for such long periods were criticized by the 1845 committee as “examples of improvidence and mismanagement exceeded only by the grants in perpetuity of the Tynemouth, Spurn and Skerries by the House of Commons.”^{Footnote 56} With hindsight, the committee was right, but, when the leasing contracts were signed for Smalls and Longships, Trinity House was still reluctant to take on the risk itself and preferred to contract out the building and maintenance to private partners.

Auctions and Negotiations in Providing Contracts to Entrepreneurs

Taylor argues that “lighthouses pose a problem for those desirous of competition at all levels of the economy as they are inherently monopolistic: the idea of competing lighthouses is plainly absurd.”^{Footnote 57} The idea of competition in the provision of lighthouse services is, however, not as absurd as it might appear at first. The right to erect and maintain lighthouses may be allocated on a competitive basis, in which the highest bidder, who offers the government the highest amount of money in return, could be awarded the right to collect light dues. Alternatively, the contractor who offers the lowest bid for delivering the service could win the contract. In this way governments might achieve ex ante competition (competition for the market as opposed to competition in the market),^{Footnote 58} whereby the entity that submitted the lowest bid would win the competitive tendering process and acquire the right to provide the service.

Nevertheless, this way of achieving competition in the market for lighthouse services was not used by the English government, which instead negotiated directly with potential contractors. These negotiations with a few individuals is the key reason why Hague and Christie claim that “it was the machinations, favours and corruptions of the seventeenth-century court which created ideal conditions for privileges which became firmly entrenched that they resisted repeated attempts at reform in the nineteenth century.”^{Footnote 59} There are, however, two reasons for believing that this strategy was used to increase the number of lighthouses rather than as a reward to favored people: first, negotiations with entrepreneurs were, under certain circumstances, a better way of allocating resources than competition; and, second, when new lighthouses were proposed, ship owners were always given an opportunity to express any interest in financially supporting such proposals, by means of paying light dues. If support failed, lighthouse projects did not come through. As has been observed within auction theory, auctions are not always the best way of allocating resources. It may seem that competition at an auction would be a better mechanism than negotiations with a favored contractor. However, auctions do not function well in cases where projects are complex, the contractual design is incomplete, and when there are few available bidders.^{Footnote 60} Complex projects that are difficult to specify in advance are less suited for auctions, in which the most relevant variable is the bid. Complexity thus encourages negotiation, especially when contractors are experienced.^{Footnote 61} We do not have information regarding the building costs of early lighthouses, but the 1861 Royal Commission enumerates some problems associated with comparing costs: it is difficult to compare costs between different regions in the United Kingdom and even more difficult to compare expenses incurred in different countries, such as France.^{Footnote 62} These difficulties arise because of varying conditions: the requisite height of the tower, the accessibility of the site, the facility of procuring material and workmen, and “many other circumstances varying with the locality.”^{Footnote 63} These insights, which were probably evident in both the seventeenth and nineteenth centuries, explain why there were no auctions when the English government supported the construction of lighthouses, because the terms of the auction would be very difficult to determine. Careful negotiations, in contrast, when there were few potential builders of lighthouses, which was the case in England, was a workable model for providing contracts to lighthouse entrepreneurs. Not only did private entrepreneurs have a personal stake in the costs of the lighthouse, as emphasized by Bertrand, but the only variable they could control in the presence of price fixing in order to increase net profits was to lower these costs.^{Footnote 64} If cost reduction became associated with a reduction in lighthouse quality, this would put ships in danger. Bertrand claims that the private construction of the Eddystone lighthouse led to insufficient quality (as a number of documented reparations might indicate) of the building because of the lack of regulations.^{Footnote 65}

Profits

Coase, however, did not recognize the endemic problem of delegating authority to an agent with interests other than the Crown’s. Because the agent was the residual claimant in the case, private owners had an interest in collecting lighthouse dues that were as high as possible, as negotiated with the state and codified in charters. One source of conflict in the nineteenth century was the high profits made by all lighthouse owners, including Trinity House, although the private lighthouses made vastly higher profits than the government lighthouses. Table 1 shows the estimated net profits made by various lighthouses in the UK in 1832.

Table 1.

Net profits from all lighthouses in the UK, 1832

Source:

Selected Committee 1834, 38–39.

The profits remained, and the key issue is to whom did these profits fall: private entrepreneurs, the public, or Trinity House with its alms receivers? The net profits from the fifty-five lighthouses owned by Trinity House in 1832 had increased by 50 percent by 1843 (Table 2), and the profits from acquired, or newly constructed, lighthouses were even higher. The most important consideration, however, is that the high profits of private lighthouses, obtained under Trinity House’s management, in 1832 were reduced significantly (£4,309 compared with £1,492). One reason why the dues were not immediately reduced was that Trinity House was required to pay the debt incurred by the purchase of the private lighthouses for £1,200,000, and the loans were paid off in 1848.^{Footnote 66} A further reduction was possible in 1853 when, as a result of the discontinuation of its pension fund, Trinity House was no longer allowed to use its profits for charitable purposes, such as pensions for mariners and their families. Attempts to retain incomes from former private lighthouses, on the basis that “a grant is valid, if the dues granted are reasonable at the time of the grant, and continues so valid, notwithstanding that from a subsequent increase of shipping the dues may afford a profit.”^{Footnote 67}

Table 2.

Net profits from all lighthouses in the UK, 1843

Source:

Selected Committee 1845, 22, 435–436.

^a The same 55 lights as controlled in 1832, to allow direct comparison.

The importance of who controlled the residual rights is demonstrated by the reaction of the Board of Trade in 1853, who brushed aside the claims by Trinity House that the income from the lighthouses in the form of light dues was its property: “the property so vested in the Corporation . . . is held by them . . . in trust for public purposes, and liable, therefore, to be dealt with upon considerations of public policy.”^{Footnote 68} Being an institution that served public policy, Trinity House was also responsible to the public and government agencies to fulfill that role. The report from the Selected Committee of 1845 gathered opinions from shippers regarding the impact of centralization on the lighthouse system. The shippers seemed to be satisfied with the effect of nationalization on efficiency: no complaints by any witnesses before the committee expressed dissatisfaction with the efficiency of the lights, but high light dues remained a problem.^{Footnote 69} According to the report of the 1834 committee, one consequence of the decentralized lighthouse administration was the wide variation of light dues. The committee found that “there does not appear to be any rule for those rates.”^{Footnote 70} The 1834 committee report stresses irregularities in the lighthouse systems. According to the 1845 committee, light dues were heavier on British shipping compared with those of other countries. Evidence for this was “numerous,” but the committee quotes only two statements. The claims made by these two shippers suggested that light dues amounted to 51 percent and 68 percent a year of the profits for the respective firms.^{Footnote 71}

The remaining private lighthouses were purchased for a total sum of almost £1,200,000 in 1836.^{Footnote 72} The committee points to the ineffectiveness inherent in the complex system of ownership, management, and dues that characterized the English lighthouse system. It claimed further that the dues amounted to nothing more than high taxes that benefited a few privileged individuals while damaging the competitiveness of British merchant shipping. The conclusions of the committee were interpreted by Taylor as follows: “Private ownership of lights led to inefficiency in management, high collection costs, and wide variation in charges for lights.”^{Footnote 73} Taylor argues that nationalization was based on an ideology in leading government circles, where “certain resources should be excluded from the realm of private property by the state, and that private profit made at the expense of the public interest was morally wrong.” Furthermore, “even in an industrializing, expanding economy, private profit was not always seen as desirable: some services, it was held, should be nonprofit making.”^{Footnote 74}

Taylor also agrees that the lighthouse system, endorsed by Coase, was a result of “old corruption” and that “the state . . . had caused the problem by granting rights to levy light dues to individuals.”^{Footnote 75} It should be noted, though, that the varying dues partly reflected the difficulties in financing lighthouses in remote places and thus was a sign of the government’s public policy. Dues levied by Trinity House varied from lighthouse to lighthouse and depended on the class of ship, the tonnage of the ship, the trade in which a ship was engaged, and where it was bound. Foreign dues were double and rates differed between coastal and overseas trade.^{Footnote 76} As stated earlier, the dues varied between foreign and British vessels and between lighthouses. The three lighthouses at Fern demanded a due of ¾ d per ton; the lighthouse at Spurn demanded ½ d per ton; Foulness demanded ¼ d per ton; and the floating light at St. Nicholas Gatt demanded 1/8 d.^{Footnote 77} After nationalization, individual lighthouses had to bear their own costs, so the dues continued to vary from lighthouse to lighthouse. The system of varying dues after nationalization cannot be explained by noting that the dues rates, as well as their contractual terms, were inherited from previous owners. From 1834 onward, Trinity House established a number of lighthouses with individual toll rates payable for each establishment. The rates varied as follows: the Start light (first exhibited in 1836) demanded a toll rate of ½ d per ton; the Shipwash light (first exhibited in 1837) demanded 1/8 d per ton; and the Avon light demanded ¼ d.^{Footnote 78} One advantage of a centralized, rather than a decentralized, system was that it was easier to adjust rates without having to bargain with many proprietors. Between 1822 and 1832, Trinity House reduced the light dues for many of its lighthouses by 50 percent.^{Footnote 79}

Three factors determined the returns from lighthouses: the level of the light dues (measured as a rate per ton), the number of ships passing a lighthouse, and the ships’ tonnage. The cost of constructing a lighthouse was considerable, and since they were usually built in places where the traffic was low, lighthouse owners had to receive compensation through the government’s enforced light dues and not by market exchange. For these reasons it was permissible to collect relatively higher dues. Lighthouse dues therefore varied between locations in order to induce the construction of lighthouses in remote places or places where lighthouse construction was difficult and expensive.