Another day, another case of firefighters letting a house burn because the owner didn’t subscribe to fire service. I wrote about this before in the context of pay-for-service ambulances, and what I’m beginning to realize is that, well, everyone is wrong. Here’s a summary of what I’ve been hearing on the fire department issue:
- one group: See, this is the bad shi*t that results when essential services are privatized.
- second group: See? Markets work.
In reality, private fire services could work if implemented properly, it just so happens that they seem to have been implemented in a less than thoughtful manner. (In addition, these fire services aren’t technically privatized, since the services are still being provided by a government.) As a result, the outcomes that we see are not economically efficient.
At a very basic level, it’s not efficient to let the house burn down because the value to society of the house and whatever contents would have been recoverable most likely outweighs the cost of putting out the fire. Therefore, any efficient private system would have to result in the fire getting put out. This is likely why most fire services are provided by the government and not limited to paying customers. A private system, however, would encounter problems if it didn’t restrict its service to paying customers, since at least some people would try to free ride and get their fire put out without paying the fee. One potential solution would be for the government to allow a privatized fire department but stipulate that, if a fire occurs at the home of a non-paying customer, the government will pay the fire department to put out the fire but then take possession of the house. (Please hold all conspiracy theories about the government committing arson on homes of non-paying customers for another time.)
Since the value of the house probably far outweighs the marginal cost of putting out the fire, you might be pondering why anyone wouldn’t subscribe to the fire service. Contrary to most economic assumptions about rationality, one simple explanation could be oversight. It seems a little strange to me that the only way to get fire service would be to subscribe to a form of insurance rather than just pay for the fire department to come and put out a fire, if for no other reason than the latter sort of system would mitigate the oversight problem. In addition, offering a pay-for-service model would alleviate a lot of moral hazard issues associated with insurance. (In other words, moral hazard occurs with the subscription version of the service if people are less careful because they know that the fire department will come bail them out for “free.”) Obviously the pay-for-service fee would have to be large compared to the subscription fee if the fire department’s goal is to actually get people to subscribe to the service.
If the fire department were to offer a pay-for-service product, should the government still serve as the backup customer as described above? Probably. Most economists would assume that, if a family doesn’t pay to have the fire put out, it must be the case that the house isn’t worth what the fire service costs. However, it could just as easily be the case that the family doesn’t have the money or access to credit to hire the fire department. On the other hand, it could also be the case that the family doesn’t value the house as much as other members of society do. (This could either be because of differing valuations of the property or because there are negative side effects associated with having a burnt-down house on one’s street.) If this is the case, then the government could act as a market maker to transfer the house to someone who values the house enough to pay for the fire service.
I hope that it’s clear by this point that neither a public nor a private offering of some goods and services is automatically good or bad, and it matters a lot how the markets are implemented…so can we please stop arguing about public versus private and start arguing about smart versus stupid?