As I’m sure most are familiar with by now, firefighters in Tennessee recently refused to put out a house fire because the family hadn’t paid the service fees, and despite their offers to pay them, the fire company let the house burn to the ground. While this is a terrible tragedy, there are several important lessons about public policy here, and -as the title to this post suggests- there are several lessons that aren’t here, which people seem to believe are.
Like Paul Krugman I do think that this case presents a somewhat apt example for the moral hazard of health care, and that if you can’t credibly refuse to deny a service to someone it makes sense to force them to pay for it in advance. The question is, can they credibly deny the service?
On the one hand I think the townspeople who hadn’t been paying their service fees probably got up to date pretty quickly after this incident, as the fire company very much demonstrated that they can credibly deny service.
On the other hand, given the public outcry against this and the fact that a neighbor’s house caught on fire as a result, perhaps the fire company has learned that they can’t credibly deny service.
An important question remains for the locals in that area: having watched a neighbor’s house burn down, are you prepared to wager that your other neighbors have learned their lesson? This gets at an underappreciated public goods aspect of the issue that is aside from clear danger externality: nobody likes to watch their neighbor’s house burn down. It is a giant, unignorable, tragic, and heartbreaking spectacle that I’m sure every neighbor of that Tennessee home would have, ex post, willingly paid to avoid. This means that aside from danger externalities, there is an additional reason why fire insurance would be under-provided. It may be that given a level of mortgage debt and risk preferences, the service fee the fire company charged was not worth it even for a rational homeowner. But taking into consideration their neighbor’s desire to not see the house burn, it is likely inefficient for them not to have it. This suggests a mandate or tax.
On the other hand, I strongly disagree with the contention that this tells us anything about libertarianism. Is a voluntary provision of public services more libertarian than a mandatory provision? Yes, on the margin. But saying this is a “failure” of libertarianism, or that libertarian thinking is to blame, is like blaming the huge debts of the U.S. Postal Service on libertarianism because the post office isn’t a completely free service paid for by taxes. It’s also like blaming the failure of Fannie/Freddie on libertarians because they were GSEs rather than fully government run. For many libertarians these may be second, third, or fourth best outcomes, but for far more government optimists they are first or second best outcomes; this is a failure of government optimism.
In addition, I have to believe that the fire company was simply behaving in accordance with the law, and that they weren’t responding to the fire because they weren’t allowed to. At the very least they had no monetary incentive to go put that fire out (one would think they had plenty of moral incentive, but apparently that wasn’t enough). In contrast, had they had been a for profit company free to behave in a profit maximizing way, they would have certainly gone to put out the fire as they could have perfectly price discriminated. This is a “sinking ship” scenario sometimes discussed in price gouging contexts, as discussed here by Richard Posner:
Suppose a ship is sinking, and another ship comes along in time to save the cargo and passengers of the first. The second ship demands, as its price for saving the cargo and passengers of the first ship, that the owner of the ship give it the ship and two-thirds of the rescued cargo, and the captain of the first ship, on behalf of the owner, being desperate agrees.
Clearly, this is a highly profitable and pareto improving scenario. Posner informs us, however, that such contracts are unenforceable under admirality law and common law, so this might limit a private fire company’s ability to profit here.
Nevertheless, unlike a government run fire company, a private one would have plenty of incentive to put out the fire.

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Thursday ~ October 7th, 2010 at 10:26 am
Johnnie Linn
This is not an example of moral hazard. Moral hazard is careless behavior of people who are insured. Those who believe in mandates will also take the next step: argue for control of the behavior of insured people, on the basis of moral hazard.
Thursday ~ October 7th, 2010 at 11:43 am
Adam Ozimek
I disagree. They believed they had implicit insurance, “surely the fire company won’t let our house burn down!”, so they didn’t bother buying actual fire fighting services. It just turns out they were wrong. They belief they would be covered in a bad state induced risky behavior, that’s moral hazard.
Thursday ~ October 7th, 2010 at 11:56 am
RickRussellTX
I’m really astonished at the level of public invective this case has generated.
In this region, local government provides a strictly optional fire extinguishing service. It’s completely optional; either protect yourself with appropriate fire extinguishing hardware, or pay the tax and let the fire department do it, or take your chances.
This seems like an entirely reasonable approach, and Mr. Granick went into it with full knowledge of what would happen in the event of a fire.
RR
Thursday ~ October 7th, 2010 at 12:30 pm
Johnnie Linn
By Paul Krugman’s own definition, moral hazard is:
[from Wikipedia]
“…any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”
In this situation someone else did not bear the cost when things went badly.
Thursday ~ October 7th, 2010 at 12:25 pm
Frank Schmitt
As others have pointed out elsewhere, the correct response would have been to put out the fire and then bill the homeowner for the full cost of labor and materials consumed in doing so.
Much like if I’m an uninsured patient with a broken leg, a hospital won’t refuse treatment, they’ll simply leave me on the hook for paying for it. This doesn’t work so well in healthcare because the cost of treatment can so quickly exceed the patient’s ability to pay, and the imperative to provide lifesaving treatment is a moral one, not a financial one.
In the case of a fire it’s a simple cost-benefit calculation: once the cost of extinguishing it exceeds the value of what will be rescued, it’s best to do nothing more than keep it from spreading.
Thursday ~ October 7th, 2010 at 12:44 pm
Roland
As I noted elsewhere,Posner’s example was based on Marcus Licinius Crassus’ business model. His team of clients rushed to a fire, and offered to buy the property. If the sale was agreed, they put out the fire. If not…
Thursday ~ October 7th, 2010 at 12:57 pm
Adam Ozimek
Johnnie,
The homeowners were behaving as if the costs would be borne by someone else. I think the firefighters not putting the fire out probably surprised everyone. So a priori it appeared to be a moral hazard, and by the beliefs of the homeowner it was as well. This is similar to where we would be had the fed not bailed out the financial sector; if you believe that implicit guarantee induced risky bank behavior, would it be much less of a moral hazard that they were incorrect in their assumption?
If the implicit guarantee induces risky behavior, then I say it is a moral hazard since that is 4/5 of the story.
But perhaps this is just semantics now.
Thursday ~ October 7th, 2010 at 1:10 pm
Johnnie Linn
Moral hazard and adverse selection do not presuppose that beliefs held by someone are false. Moral hazard and adverse selection arise from asymmetry in true information (perhaps there isn’t even such as thing as “false information”) and both parties are acting rationally.
Paul Krugman, in the post of his you linked to, does not identify this situation as an example of moral hazard. Nor have we heard, or at least I haven’t heard, yet from the homeowners about what they were thinking. Maybe we can wait until the homeowners or Krugman weigh in.
No, this is not just semantics now. It is about error.
Thursday ~ October 7th, 2010 at 8:30 pm
Adam Ozimek
Johnnie,
I disagree that asymmetric information is necessary for moral hazard in the real world. Yes, textbook models use asymmetric information to arrive at moral hazards but it is by no means necessary.
For example, say a central bank knows a large bank is behaving with high risk because it knows it will be bailed out. Say the central bank knows this is true, but it lacks both the authority to stop the large bank from behaving with high risk and it lacks the ability to credibly commit to not bailing it out. Here you have a clear moral hazard with no information asymmetry.
But with respect to whether the Tennessee case is a moral hazard you very well may be correct. But up until the moment the fire company decides whether or not to put the fire out it is the same as a moral hazard. The consumer here behaves no differently than if the fire company did put out the fire, and the consumer believed he would be bailed out, so from the perspective of consumer behavior this had all of the relevant characteristics of a moral hazard. If you say that’s not technically a moral hazard, then fine I will call it “up until t minus epsilon a scenario with all the makings of a moral hazard, but at point t it is simply almost a moral hazard”.
Thursday ~ October 7th, 2010 at 11:24 pm
Johnnie Linn
The word “credibly” in the bank example indicates a belief that turns out to be falsely held: again, a case of error, not moral hazard.
You are right about the asymmetric information condition: the sources say that the effects of moral hazard can be duplicated by force of law. The effect of forced moral hazard is likely to be worse than unforced moral hazard in that the government is likely to have less information than either of the other two parties.
Can someone direct me to any info on what the Cranicks’ thoughts were?
Thursday ~ October 7th, 2010 at 4:30 pm
Anonymous At Work
It’s not a problem with libertarianism per se; it’s just a conversation that libertarians, especially ones wishing to make public services either for-profit or voluntary, will have to have. “Under what other circumstances will you be willing to condone this result?”
Thursday ~ October 7th, 2010 at 7:29 pm
jazzbumpa
As is almost always the case, Adam, you are dealing with abstractions, not realities. The reality here is that there were five scenarios under discussion in this county for providing fire protection for the residents. One of them was to raise property taxes by 13 cents.
Let me repeat that for emphasis. Raise property taxes by 13 god damned cents! Another was to allocate finds our of <b<existing resources. You see, the County had funds available, and recognized a specific need for its citizens. Alternative #4 – the $75 fee, was considered by any rational measure the least desirable and least popular alternative. But it was what the Republican Co. commissioner decided to implement.
You see, the whole situation need not have happened. It was entirely preventable, at essentially no cost to anyone.
So, yes, this wanton experiment in libertarian idiocy is exactly the root cause.
The relevant question is what kind of society do we want to be? Are we a real society of mutually helpful citizens who recognize common goals and work toward them together, or merely a more-or-less random collection of atomized units? The Libertarian answer is the latter. If you guys would please just hurry up and go Galt already, the rest of us could get to the serious business of repairing the damage you do every day.
Meanwhile, WASF,
JzB
Thursday ~ October 7th, 2010 at 8:32 pm
Adam Ozimek
JzB, you are correct I am talking about abstractions here. In this particular case a tax may very well have been the best way to go. Then again, do you think anyone in that down will fall behind on their service payments ever again?
Thursday ~ October 7th, 2010 at 9:07 pm
jazzbumpa
Oh – and lest anyone think I was making stuff up, the literal 13 cents is based on a required .13 cent assessment increase times a typical (and rather abstract) $100,000 evaluation.
See pages 21 and 22.
http://troy.troytn.com/Obion%20County%20Fire%20Department%20Presentation%20Presented%20to%20the%20County%20Commission.pdf
Adam – Your flip comment about service payments is beneath contempt. I’m just about ready to give on you as a human being, and this is not hyperbole. The real point is that none of this was necessary. The county had the money in its pocket, and there was absolutely NO need for the service fee. The decision to engage in this libertarian experiment was totally optional and arbitrary, and against the local study’s recommendation.
Emphasis added:
Example #4 is the least favorable method. Collection would still be an issue and the fire departments would have no recourse if a rural resident refused to pay the subscription
In the civilized world, fire fighting is a tax-supported community service, not a gangland style protection racket. It’s part of being a civilization, not a John Galt dystopia.
Now I must go hug a squid.
WASF,
JzB
Thursday ~ October 7th, 2010 at 7:34 pm
CraigM
history doesn’t support the assertion that privatized fire departments would’ve put the fire out instead of letting it burn. competition and the unprofitability of fire insurance coverage also made it untenable to private as a private service:
http://eh.net/encyclopedia/article/Baranoff.Fire.final
“Competition forced insurers to base their premiums on short-term costs. As a result, fire insurance rates were inadequate to cover the long-term costs associated with the city-wide conflagrations that might occur unpredictably once or twice in a generation. When another large fire occurred, many consumers would be left with worthless policies.
Aware of this danger, insurers struggled to raise rates through cooperation. Their most notable effort was the National Board of Fire Underwriters. Formed in 1866 with 75 member companies, it established local boards throughout the country to set uniform rates. But by 1870, renewed competition led the members of the National Board to give up the attempt.”
I agree that this doesn’t discredit “Libertarianism” as an ideology. But the idea that any and all services can be done better through a private for-profit mechanism is absurd; particularly when we’ve tried it in the past, and it failed due to the reasons cited above.
Thursday ~ October 7th, 2010 at 8:34 pm
Adam Ozimek
Craig, thanks for the interesting historical information. That was a long time ago, so it’s hard to say that it disproves that privatized fire companies could exist today.
Thursday ~ October 7th, 2010 at 7:37 pm
CraigM
“Private as a private service” = “Provide as a private service.” damn you, lack of post edit options…
Friday ~ October 8th, 2010 at 10:07 am
sardonic_sob
It is interesting to note that insofar as I can determine, while the “base concept” – pay a set fee for what is essentially “fire insurance” in the literal sense – may be libertarian, the way things actually happened was exactly the opposite of a libertarian approach. The firefighters weren’t allowed to fight the fire. Because they were government employees and the government had ruled that you had to pay the fee as they dictated before the firefighters would come. They weren’t allowed to take the fee at the time. They weren’t allowed to negotiate an appropriate fee, or to just take the homeowner’s word that he’d pay the fee and/or an appropriate amount for their labor. They had absolutely no freedom of action nor any discretion whatsoever. If they’d fought the fire anyway, they would have been subject to disciplinary action. (Thought I doubt we’ve reached the point where anybody would have tried or would have been able to make it stick if they had. Yet.)
In other words, this is not a failure of libertarianism. This is a failure of stupid laws and their implementation by bureaucrats exhibiting learned helplessness. Same ol’ story, slightly different cover.
Friday ~ October 8th, 2010 at 3:18 pm
Melanie B
Wasn’t the fire department a public entity? Why does this failure reflect badly on privatization?
The fire department could have simply stated that they will extinguish the fire for $75. The woman could have bargained for that. I think most of this lies in the fire departments’ 1) lack of accountability (are they measured against the fires they extinguish?) and 2) lack of ability to bargain for services.
Friday ~ October 8th, 2010 at 5:33 pm
blokeinfrance
Interesting points. Can I comment on Posner’s “price gouging”, which does seem to get the moralism in a bit early.
The sinking ship scenario (like Crassus’s) is a very ancient bit of “price gouging”. It also forms the basis of Lloyds of London’s standard salvage contract, usually confirmed by subsequent tribunals. A Dutch company (Smit, if memory serves) has maintained a worldwide fleet of tugs for over a century exploiting just such sinking ship scenarios.
Of course, from time to time the captain throws the tow rope overboard. It’s happened. And then, when the oil tanker hits the rocks, that’s not moral hazard, that’s just f**king your neighbour.