Stock Exchanges as Lighthouses

Abstract

AbstractOver the years, it has frequently been argued by economists that lighthouses need to be provided by the state. Ronald Coase demonstrated, in fact, that they could be provided privately. The same is true of financial regulation. Though many economists, using blackboard economics, argue that financial markets need to be regulated by the state, it is found that regulatory mechanisms evolve in the market which are effective and stable. It is feasible that a central bank could also evolve as a private institution to regulate the banking sector. Nevertheless, there could be legitimate concern that such institutions will become concentrations of market power or will require legal privileges to operate. In fact, this was one of the concerns that was expressed in relation to the private provision of lighthouses. The analogy between private regulatory institutions such as stock exchanges and lighthouses is therefore remarkably close.