I often think about privatization of public goods because I think it’s a good intellectual exercise. The same way economists think about the benefits of free trade despite the absence of a pure free-trade system, thinking about privatization can inform our understanding of the relative merits of the public and private arrangements of service provision. I was having a conversation with some friends this weekend at a bar and the issue of private firefighters came up, so I thought I’d take this opportunity to write about the subject.
The classic pithy retort to a system of private fighters is to envision the tragic senario of a person not “paying their fire-protection fee” and so having to stand around and watch their house burn while the firefighters either sit comfortably watching TV back at the station or are waiting at the scene on-call to protect the fire spreading to neighbors’ houses that had wisely forked over their yearly fee. That this scenario is plausible under a private firefighting system I won’t deny; what I do find implausible is that it would become the dominate feature of a private system as many seem to imply with their all-to-easy dismissal of privatization.
Such a thought experiment ignorantly imposes our current system’s homeowner behavior onto a system that provides vastly different incentives. It’s clear, after all, that incentives affect behavior. The primary tool of economics is to consider the effectives of incentives on the behavior of rational actors. Thus, utilizing the economic way of thinking the correct way to construct the though experiment is to consider all of the effects and incentives and create a more narrative and robust story that goes beyond assuming the worst possible outcome as the only possible outcome.
We can think of firefighting as a form of mandatory insurance. It is funded through tax dollars that are collected with Uncle Sam’s monopoly on the collection of such things. When your house (or car, or forest) catches fire, it takes one 30-second call and the heroic firemen are on their way. In this way firefighting is somewhat better than normal insurance since it is both instant and its benefits can be invoked by anyone who sees the fire burning. On the other hand, firemen themselves are responsible only for putting out the fire, which is why standard fire insurance is necessary to insure against losses that do occur.
To force consideration of the incentives, let’s first imagine a world with no firefighters at all. What might happen? Well, the risk-weighted cost to homeownership would change for a substantial portion of the population. This would be most prominent for homeowners living in certain parts of California, Arizona, and other areas at high risk of fire. In the absence of firefighters there would be strong incentives not to relocate to one of these regions, at least for the average home buyer. Over the long term you might imagine a net outward migration.
Knowing that no one is available to extinguish a fire should it break out, on the whole homeowners would probably be more likely to install better fire suppresent systems and be more careful about fire hazards in their home. The sale of fire resistant safes would likely increase as homeowners moved to protect precious pictures, antiques, and other items of familial significance. Neighborhoods might ban together to purchase water reservoirs or smaller firetruck-type vehicles to extinguish fires themselves. We see evidence of similar behavior in India, for example, where spotty electric grids have caused many businesses to install extensive backup generator systems.
With a private firefighting system in place I suspect much of this behavior would remain. Of course, the incentives would be different under a private system than a public system, but without a mandate some communities would undoubtedly opt to save their tax dollars and risk a fire outbreak, perhaps subject to some of the measures above.
Because there are negative externatlities to a neighbor’s house catching fire — in the form of increased risk to your own house catching ablaze and a probable reduction in property value if a house burns down — I suspect communities would incorporate into homeowner association fees the cost of securing the local private firefighting services. Insurance companies might also start getting into the firefighting game as they already have in some places. A private system would also allow for competition and price signals, which would steer firefighting resources to those communities that need them most. This might mean firefighting services in those California and Arizona suburbs at the foothills of mountainous forests would cost more than elsewhere, eliminating the current problem in which relatively low fire-risk homeowners subsidize the fire protection services needed by those who choose to live in higher risk areas. Additionally, local supply for fire protection services can more closely match demand, improving efficiency and reducing cost. Indeed, recent evidence suggests that firefighting services are being oversupplied, at least in some locations.
In urban areas, property owners would likely join together to negotiate for group rates and incorporate the cost of firefighting services into rents. Some might fear that the poorest among us could not afford such services absent a mandatory transfer system, but it is easy to imagine that charities and non-profits would be created to sponsor such citizens.
On net it seems lower monetary costs would favor a private system for the reasons outlined above. But there are other factors to consider such as coverage level, including whether charities can truly cover the indigent, as well as the net psychic benefits that accrue to a nation having a system of universal, uniform public fire-safety coverage. In the final analysis, it’s unclear which system is superior taking account of all costs and benefits. What does seem clear is that a private system should not be so easily dismissed without considering more completely the incentives at work.