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Things Economists Should Stay Away From, Fire Safety Edition…

May 6th, 2010 · 7 Comments
Econ 101 · Markets

When I talk about public goods in my class, I make it a point to contrast the services of the police department and the fire department. Consider the following definitions:

Excludability: the degree to which consumption of a good or service can be limited to paying customers

Rivalry in consumption: the degree to which my consumption of a particular unit of a good or service prevents others from consuming that same unit

Police protection has low excludability and low rivalry in consumption in a lot of ways. Why is this? Well, if you think about police departments as those people who catch criminals and deter people from doing things that are harmful to others, it’s hard to say that this only benefits people who pay their local taxes properly. Furthermore, rivalry in consumption is also low since it’s not like the fact that I benefit from a criminal not being on the loose hinders your ability to feel safe for the same reason.

Does fire protection share these same characteristics? While most towns don’t choose to operate as such, it certainly is logistically possible to limit fire rescue services to paying customers. Rivalry in consumption is also much higher for fire rescue than for a lot of police services, since if the fire truck is at my house taking care of the fact that I set my dish towel on fire by putting it too close to the gas stove burner, that same truck can’t be putting out the fire at your house.

The low excludablity of police protection means that, if police departments were privately funded, people would likely try to free ride off of each other and wait for their neighbors to pony up the cash for the cops. This means that a privately-funded police department wouldn’t have as many resources as is socially optimal, which is in large part why it makes sense for the government to provide these services and tax to fund them. The same is not true for fire rescue, however- a community could theoretically have a private fire department that comes to your house to put out fires if you pay the going rate, and it wouldn’t lead to gross underutilization of fire services. (It would, however, probably lead to some people foregoing fire services either because they can’t or don’t want to pay, which admittedly has its own problems.)

So why doesn’t this happen more? A simple video, via Mind Your Decisions, sheds some light on the matter:

It’s worth noting that this outcome is efficient, since the person who values the net the most gets it…but it’s not necessarily fair. That said, if demand exceeds supply at a price of zero, is there really a fair way to allocate the resource? It’s way too easy to overlook the fact that, when talking about the fairness (or lack thereof) of markets, the situation where everyone gets what they want at a low price isn’t usually an option. If these guys knew that they could get a high price for the use of their net, they probably would have invested in more than one net. That’s the thing with markets- high prices serve not only as a deterrent to consumers but also as an incentive to producers…and would you rather pay a high price for the net or have it not be available at all? I would take the former option, thanks.

Tags: Econ 101 · Markets

7 responses so far ↓

  • 1 Dave M // May 6, 2010 at 3:32 pm

    Rome had a problem with private fire service…

    Seems the guy placed in charge of fire services soon become one of the largest land-holders in Rome. “I tell you what: you can sell your place, which is on fire right now, to me at below its fair value, or I’ll just let it burn down.”

    The reason fire services are public is for the same reason the military is too. You don’t want a rival to buy them off at the last second, like right before a battle. It’s a crappy day when the guy that’s supposed to be guarding your right flank starts attacking you all of a sudden, you know?

  • 2 Håkan Arnoldson // May 6, 2010 at 3:46 pm

    Booth police and fire protection have pretty high excludability though.
    If you have a fire and don’t have “fire insurance” you still have to pay the cost of putting it out if it endangers your neighbours. You have an obligation to handle your property in such a way that it doesn’t pose a unreasonable risk to others. So no free-riding on your neighbours protection there.
    Police may be a bit more tricky since it may be hard for criminals to figure out who is a customer of the police and who is not. Still the job of the police is to bring people who have actually commited a crimed to justice. If the victim isn’t a customer they simply do nothing. Also this could easily be tied into economic insurance for the damages of the crime, which would make the bundle a much more excludible good.

    National defence is the difficult nut to crack. But with the amount of volunteers that have singed up to protect there homeland thru history this hardly provides any evidence that a public good constiture any kind of problem on a free-market. The tradgedy of the commons is something that only exist under government intervention.

  • 3 Håkan Arnoldson // May 6, 2010 at 3:57 pm

    Dave M: That is easily avoidable if you have property insurance which we have these days.
    Not only will the insurance company pay you full value if you don’t sell they will blacklist said fire protection service and don’t insure homes that are subscribed to it driving them instantly out of business.

    Back in the day the Danes burned my entire city to the ground like 3 times. In those days it made sense to force everyone that wanted to live inside the city walls to take part in fire protection.
    Today not so much. But we are stuck with it because “What about the poor that can’t afford insurance? Should they just burn? You are satan aren’t you?”

  • 4 econgirl // May 6, 2010 at 6:09 pm

    @ Dave M: You seem to be under the assumption that government workers can’t be bought. =P

    @ Hakan: First, I apologize that my limited knowledge about special characters is preventing me from writing your name correctly. Second, is it really the victim who benefits from a criminal getting caught? (other than psychologically) It’s rare that people actually get compensated for these sort of things. Instead, the benefit is really to everyone else, since that criminal won’t be available to do the same thing to others.

    Also, what city? I am curious.

  • 5 Håkan Arnoldson // May 7, 2010 at 1:31 am

    Yes, it would take a lot of reform to the rest of justice and penal system before that argument is valid I guess. But you could extort financial compensation from most criminals rather then just punishing them. Wouldn’t work with the most violent ones of course, but they are a very small portion of all violent and property crime.

    But yes it is more of a public good then firefighting. Though I doubt there would be any problems with under utilization of defence against criminals.
    There are many ways the market could solve that: bundle police service with financial insurance against crime, people protecting themselves, insurance companies hiring police cause there clients could be next and so forth.

    Gothenburg, Sweden.
    Starting with us burning the city when it was captures in 1304, it has been burned down by the danes and prior to danish invasions a few times. Then there has been like 15 accidental fires within the city walls that destroyes hundreds of buildings.
    Then someone figures out that building stuff in stone and having proper fire streets may be a good idea in like 1800…

  • 6 Justin Ross // May 7, 2010 at 8:26 am

    This description seems to conflate “private” fire service with “for-profit.” My understanding of pre-public produced fire service was that it was a very Ostrom-like non-profit community-based set of arrangements (I am not aware of E.O. doing any work on the issue of fire, but the description of how they worked resemble a lot of what she says on other similar public & civic problems).

    From what I understand, fire service was “publicized” to by politicians trying to form public servant coalitions that would support them. I think this was in the era that ended up leading to Dillon’s Law.

    Two relevant cites that pop up first in my google que is:
    Roger Ahlbrandt, Jr., Efficiency in the Provision of Fire Services, 16 Public Choice 1 (1973)

    Fred S. McChesney, Prohibitions on Volunteer Fire-Fighting in Nineteenth Century America: A Property Rights Perspective, 15 Journal of Legal Studies 69 (1986)

  • 7 Dave // May 7, 2010 at 3:01 pm

    This is my favorite story about fire protection:

    I ask students if the fire department should have let the house burn and they almost all say no. Then I have them think about the incentives that would create.

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