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.