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CA Foundation · Business Economics · Public Finance

A lighthouse guiding ships along the coast is often cited as a public good. Why is it difficult for a private firm to profitably supply it?

A lighthouse is hard for a private firm to supply because its benefits are non-excludable. Ships cannot be stopped from using the light, so they can free ride without paying. The firm cannot collect adequate revenue, so the market under-provides it and government provision is usually needed.

  1. AShips that benefit cannot be excluded from using the light, so most will not pay voluntarilyCorrect
  2. BThe lighthouse is rival in consumption, so only one ship can use it at a time
  3. CThe lighthouse yields no benefit to any ship
  4. DPrivate firms are legally barred from owning any structure on the coast

Explanation

A lighthouse is non-excludable: once the light shines, ships cannot be prevented from using it. Users therefore have an incentive to free ride and not pay, so a private seller cannot collect enough revenue. Option B is wrong because the light is non-rival, since one ship's use does not reduce what others receive.

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