The Economics of Fire Protection

Returning to the issue of “fire protection/suppression” which has now become a widespread topic in the blogopshere, I note that Arnold Kling has attempted to sketch out the economics of fire protection. He treats it as a club good, which is an excludable and non-rivalrous good, although congestion, which is a function of club size, can cause a certain degree of rivalry to arise in the consumption of it within the club. Kling applies a two-part pricing model typical for club goods which involves a fixed, up-front membership fee and per unit charges for use of the facility or resource. However’s Klings napkin calculations of this per unit charge for fire suppression would dissuade most from wanting to join this club. I don’t think his two-part tariff club good model is correct. And empirically, fire protection has not evolved from or into a two-part pricing club good model within liberal institutionalism.

A good paper I would recommend is The Economics of Fire Protection: From the Great Fire of London to Rural/Metro by Jennifer Anne Carlson, published by the British Institute of Economic Affairs back in 2005. Carlson chronicles the almost AnCap like private provision of fire protection/suppression services in London for almost two centuries after the Great London Fire of 1666. However, this good emerged as provision of competing insurance companies and not as a good from a private market of competing fire departments. But, as Carlson’s research indicates, the insurance companies were never able to enforce excludability of fire protection to policy holders(members). If you weren’t previously familiar with the anachronistic tradition of placing “plaques” on the front doors of homes/buildings indicating coverage, I’m sure you are by now(if you have read any progressive commentary). However, Carlson documents that, contrary to pundit opinion, the evidence contradicts the notion that the fire brigades of insurance companies intentionally allowed buildings to burn. This is attributed to the fact that the insurance companies had no natural monopoly in the provision of insurance. For example, people used different insurance companies to insure different things(property vs. valuables). Also the insurance companies, in the end, wouldn’t remove the plaques if the coverage had lapsed or been terminated because they were viewed as a valuable form of advertisement. The private fire brigades of these insurance companies ended up cooperating with each other to provide, more or less, a universal fire protection service to any in need. In some sense, an analogy can be made to today’s internet peering among network providers, which is “exchange traffic settlement free, derive revenue from customer base(with respect to our historical case, it would be extinguish fire, derive revenue from policy holders).” However, as Carlson notes, this model would break down eventually as the London Metropolis grew and became more complex. The problem is that the insurance companies were in the business of providing insurance and not providing fire protection divorced from insurance. In other words, they had no way to monetize a growing market segmentation in the demand for fire protection. This created a growing free-rider problem. By 1832, with the formation of the London Fire Engine Establishment, settlement-free fire extinguishment would be replaced by extinguish fire, settle later. This, however, was not particularly resilient solution, as it didn’t really resolve the free rider problem of the increased externalization of costs of fire protection to the policy holders. When a major fire event occurred a couple of decades later, huge premium increases would lead to an end of the private insurance provision of fire protection in London. It would be supplanted by Municipal provision.

In the United States, Fire Protection arose from more or less from a type of common-pool good model. It wasn’t a natural monopoly. The good was provided by volunteers; there was no excludability to members of the community, and a quite a few competing groups would form to serve the same community who were competing, more or less, on status. In a sense, to analogize to our current context, it’s similar in some respects to open source software. Over time, of course, fire protection in many areas would go to Municipal provision, although, still, the great majority of firefighters today are still volunteer, roughly 75%. And fire protection is hardly all municipal. In many rural areas, fire protection is provided by subscription or volunteer contribution. And there are more than just a few municipalities that have “privatized” provision. And it should be noted that non-municipal provision of fire protection/suppression does not follow Kling’s two-part tariff club good model. In the case of Rural/Metro, which is the largest private company provider, in some areas it relies on taxes to provide it’s services, but in other areas it relies on a subscription model. But it’s not the two-part tariff club good model. There are no per unit charges for subscribers. Nonsubscribers can receive the good if they agree to pay an hourly rate for use.¹

As a side note, in a previous post, I referred to the “Brain Dead Political Left.” But since then, in watching and reading germane commentary, it’s clear they are making an argument that voluntary government is simply immoral. And I’m reminded of an earlier post, Libertarianism vs Social Democracy where I noted that in the original Tucker vs Shaw debate Tucker was making a moral argument against State Socialism and Shaw was making an economic argument against libertarianism. I then noted that today the tables have turned. It’s the libertarians who typically resort to economics and the Social Democrats who resort to moral appeals. Well, you won’t find a better example than this. And I’m sorry, but it’s not a moral crime to understand economics.

¹ Do not conflate this as a libertarian endorsement of Rural/Metro