Should they have let the guy’s house burn down?

by on October 6, 2010 at 7:34 am in Current Affairs, Economics, Philosophy | Permalink

David Henderson blogs some of the basic information (Cohn at TNR comments here).  Here is the upshot:

He refers to a story about a man who failed to pay an annual fee for fire protection and then, when his house caught on fire and he called the fire department, the fire department refused to show up.

They wouldn't even let him pay up ex post.  David notes that this is a government-run fire department and thus the story is not much of a moral reductio on the market.  Arguably a private company would behave the same way, sometimes, but it 's odd to claim that government failure reminds you market failure is possible and so let's damn the market.  By the way, markets do pretty well at setting up schemes with a penalty for late payment; that's how my mortgage works.

I would make a broader point.  Any social system must, at some stage of interactions, impose some morally unacceptable penalties.  If you are very hungry, and you shoplift food, they still might prosecute you.  If you don't pay your taxes, and resist wage garnishes, they might put you in jail.  If you resist arrest, they might, at some point in the chain of events, shoot you while trying to escape.  Somewhere along the line there is a doctor who can treat your rare disease except he doesn't feel like working so much, and so he lets you die or suffer; you can find both private and public sector examples here. 

Social systems proceed by (usually) covering up the brutalities upon which they are based.  The doctor doesn't let you get to his door and then turn you away, rather his home address is hard to find.  The government handcuffs you so they don't have to shoot you trying to escape.  And so on.

To borrow language from Thomas Schelling, social systems involve costs in terms of both "known" and "statistical" lives.  It's the sum total of costs which is important.  It's fine (though controversial) to argue that a "known" life should be more important than a "statistical" life, but it's not dispositive to pull out one example of a "known" life and draw a significant conclusion from that anecdote.  That's what we teach students not to do in first year principles, sometimes citing Bastiat, the seen and the unseen, and so on.

I don't favor the policies of this fire department, but simply pointing out the vividness one of these social brutalities doesn't much influence me about the broader principles at stake.

1 John Thacker October 6, 2010 at 4:00 am

One things that the situation reminds me of is the big Asian tsunami in 2004. There was no official tsunami warning center for the Indian Ocean. The US has a Pacific Tsunami Warning Center, but countries in East Asia had been uninterested in paying the money the US requested to expand and join the system. The US's Pacific Tsunami Warning Center actually detected the earthquake and likely upcoming tsunami, but discarded the information without reporting it anywhere because it occurred outside the warning center's official area.

Some countries thought that the US center should have had a way to send the warning to the other countries, even though they had earlier refused to contribute to expanding the system to cover the Indian Ocean.

Needless to say, this was also the government, not the market.

2 Kerub October 6, 2010 at 4:11 am

I would make a difference between merit/responsability-based services (I work, I pay the FD, I get protection) and non-merit/non-responsability (I am a child, I get leucemy, I cannot pay, my parents cannot either, they don't cure me).

Is that a so hard difference to make? Why do you call "social" a normal fire insurance system alongside health-care that is much about equal opportunity for everybody (so more a constitutional/materal citizesìnship matter).

3 Andrew October 6, 2010 at 4:26 am

The government would seize your house for not paying. That's better! Oh, wait. Not. I guess at least someone else would be able to enjoy it.

Blaming a free market for a government action is wrong on its face. But Henderson is also right about the fact that it is the government that is more likely to be a stickler for rules than letting a bidder bend the rules.

4 Dan Lewis October 6, 2010 at 4:36 am

Was about to email this to you!

What bothers me about the story most is that the guy has homeowner's insurance which apparently covers the fire. There is no way the the insurer realized he didn't have coverage of the fire department, otherwise, the premiums would be higher to reflect this risk.

* The fire department charges a use fee of $75, which we can assume is revenue neutral at worst (and probably a revenue loser)
* The cost of putting out a fire is probably much lower than the cost of replacing a house which burns down entirely (and all it's stuff)
* Therefore, the insurance company should be charging a lot more than $75 in premiums for a house which has no fire department coverage.

The problem should fix itself — now that this story hit.

5 Kelly October 6, 2010 at 4:37 am

I would like to hear more about why Tyler does not favor the policies of this fire department. It made me think of Thaler & Sunstein's proposal to allow medical patients to waive the right to sue for negligence in return for lower cost of care. Maybe this gut reaction to the brutality (excellent word choice) of the system is why they conclude that courts would not respect such a contract. Imagine the first case where someone dies and the doctor could have prevented it – the whole system would break down.

Also, how does brutality aversion impact Arnold Kling's proposal to unbundle government services? Would a democratic society be able to stomach an old person not receiving social security or an umemployed single mother not getting unemployment benefits or a kid being turned away from public school, even if there was a clear and informed decision to "opt out" in each case.

6 quints October 6, 2010 at 4:40 am

Is it a travesty if you drive without insurance and wreck your car by accident and then can't get an insurer to pay you for the loss? The house was property. We are not talking about the FD not helping rescue people in danger. We are talking about property. This guy chose not to pay for the service. That's his right. I don't see this as any crime by the FD….Why didn't he think they were worth a lousy 75 bucks a year before he needed them? Because he's either selfish or a bad gambler. I feel sorry for the insurance company. They should not have to pay for his rediculous choice to not have fire department protection.

7 Ryan October 6, 2010 at 4:50 am

Prof. Cowen, it is truly bizarre to claim that a doctor who "doesn't feel like working too much" is a "morally unacceptable outcome." Perhaps the doctor has pressing obligations at home, donates his/her time to passing out food at the local charity, or – god forbid – simply needs some R&R between saving lives.

Why is it always the recipient who gets to determine the morality of the giver?

8 Floccina October 6, 2010 at 5:08 am

I am a person who always opts for very high deductibles and under-insures the value of my house. I also do not carry collision on my vehicles.

I wonder if the $75 fee is as a good value. I wonder if an insurance company would charge more or less than $75 extra/year to insure a home with fire protection. I wonder how much of the value of the home the fire department would have been able to save.

9 Jim October 6, 2010 at 5:15 am

Thanks for putting some thought into this post, Tyler.

The knee-jerk whining of the lefties on this one has been very infantile.

10 Floccina October 6, 2010 at 5:23 am

Sorry for so many posts but from what I understand on the seas there are salvage laws that would allow the fire department to put out the fire and get the value of the home but of course not the land which creates a problem.

11 Candadai Tirumalai October 6, 2010 at 5:44 am

I think that in this instance the fire

department in Tennessee was trapped by

hide-bound thinking. You put out the fire

and think of solutions to the money

situation later, one of which might have been

to impose a considerable fine on the man

who had not paid the required fee in advance.

The department seems to have argued that if

they had acted, others would in the future

avoid paying the fee, draining it of the funds

necessary for its continued operation.

12 Eric Seymour October 6, 2010 at 5:48 am

It seems to me that the best solution in this case would be for the fire department to put out the fire, and then charge the owner for the actual cost of their services. Case closed.

It's not as if the owner could claim he didn't request the fire department's services and refuse to pay the bill–he called the fire department!

13 Jared October 6, 2010 at 5:57 am

It seems that some system could be created that would limit moral hazard without putting the FD in the position of standing idly by while a house is destroyed. Say, for instance, that outside its regular service area, you can buy FD coverage for $75 / yr, but if you don't pay, you'll be assessed a substantial fee (in the thousands) for them to put the fire out — but that they'll do it either way, and without waiting for you to write the check.

Rather than focusing on making the fee substantial enough to deter "free riders," perhaps it should be set in such a way that, even after collection costs and the inevitable defaults, the FD would actually come out ahead if everyone had to pay ex post. This should signal to most homeowners that it's a good idea to pay the subscription fee.

As the arrangement stood, I would have preferred if the FD had put out the fire and then tried to come to terms with the owners afterward (recognizing that this may not be possible), but just allowing them to pay the normal fee ex post is clearly not a viable option. Houses don't catch fire annually, so if I can just pay $75 for the FD to put out a house fire, why should I ever pay an annual fee?

14 Eric Seymour October 6, 2010 at 6:09 am

@John Thacker,

"No, not just actual cost. Charging only actual cost would still give people an incentive to avoid paying for it."

Not unless you're a foolish gambler. I'd say 99 of 100 people, if given the option of paying a $75 annual subscription fee or paying thousands of dollars in the event of a fire, will choose to pay the subscription.

15 J October 6, 2010 at 6:10 am

This discussion is similar to the one at Volokh, and like that one, it's amazing how many bloggers and commenters are evidently unaware this arrangement is pretty common in rural areas, though the involvement of an actual government operated fire department is a little unusual (it's pretty much the rule with VFDs AFAIK).

"David notes that this is a government-run fire department"

Once they leave their jurisdiction (as was the case here), they're a private contractor.

"Any social system must, at some stage of interactions, impose some morally unacceptable penalties"

Which example(s) on your list do you consider morally unacceptable?

"Will it come to the point where accident victims will be given help only if they have paid their prescribed fees and only if there are no others that have paid the "deluxe membership" in line for aid?"

You've got life confused with property.

"Whoever ordered this is not only a spiteful ass, but risked a catastrophe (the fire spread)"

This was a sparsely populated rural area, not Queens. The fire department actually did respond to stop the spread to another property.

16 Andrew October 6, 2010 at 6:20 am

"So, the lesson I take from this is that compulsory health insurance, after all, is not so bad if you analogize the firetruck to access to the hospital, and the individual who didn't buy health insurance to the guy whose house was on fire."

Wrong lesson. First of all, what about the people who never use the service, say they will never use the service, don't want the service, hate the service, refuse the service? Health insurance is not a public good. I don't want the same coverage or procedures as everyone else. In fact, we just learned firefighting is not really a public good because it is NOT non-excludable.

The actual lesson is you charge the guy when he shows up. And it's fine to charge the actual cost with no markup because that is the cost people would pay. The point of charging everyone a priori is not (should not be, but of course is) to overcharge.

17 Eric Seymour October 6, 2010 at 6:29 am

The difference between this and health insurance is that you don't have a problem of adverse selection here unless you let people pay their $75 after their house is already on fire. To a first approximation, every homeowner has roughly the same risk of their house catching on fire. Certain behaviors (e.g. smoking) may increase your risk a little, but it's nothing like health insurance, where the risk that you'll incur major medical expenses increases nearly exponentially as you age (and also varies widely based on weight, family risk factors, etc.).

18 Tyler Fan October 6, 2010 at 9:00 am

I second Kelly. I would like to hear why Tyler does not support this Fire Dept’s policies.

19 MM October 6, 2010 at 10:55 am

There was a news article in which the fire chief concerned said two things of relevance:

1. Had someone been trapped in the house, they would have launched a rescue mission.

2. Had the situation been reversed, and the fire spread from a fee-paying house to a non-fee-paying one, they would have tried to protect the non-fee-paying house.

Given the above, I see nothing wrong with how the FD acted. In fact, they are somewhat unusual, and the residents of the surrounding rural areas are somewhat fortunate, in that they offer a fee-paying service at all. Also, most rural counties have the choice to vote (usually by a two-thirds majority) to set up a fire department and fund it through taxes. This (heavily Republican) county had not done so.

As for allowing them to pay once the fire had started, who from the FD should have negotiated a price? Would the caller’s verbal consent on the phone be construed as binding acceptance of a contract? What if the caller had no ability to pay, given their refusal to pay the small sum of $75?

A house in such a situation is nothing special – it is just property. If you refuse to take sensible steps to protect yourself from the risk of losing it, you might just end up really losing it. Tough.

20 Paul October 6, 2010 at 11:00 am

I build houses. It’s just stuff, wood, paperboard, paint. Plenty of people self insure, more every day. So what if it burned. Or got swept away, or slid away, or collapsed under snow, or just rotted slowly over the years.

It’s just a thing. It isn’t a ‘home’. Home is were the heart is, if at all. A house is not memories. Memories are memories.

No one in the business, the banks, the tradesmen, no one has any romantic attachment to these structures. No more than another used car to a used car lot owner. The houses are just things. Inert. No will or volition.

About the fire.

I am surprised they didn’t show up, put the fire out, and bill the guy. Say, 40 thousand.
Maybe there should be a requirement that licensed fire companies have to respond but then can bill at fixed, public costs. I would think this would be useful in selling the insurance. Many people know that having their nice car fixed can cost many thousands, so they pay hundreds a year. If the price of having a fire put out was known, more people would pay to be insured against that bill.

There are entire cites now that should be burned to the ground, like Detroit. There is not enough economy to support the maintenance, let alone mythical rebuild. There are hundreds of dead and dying cities in the US. Mostly in the North East, and upper Mid West. They didn’t exist at one time, because there was no reason for them to. Now those reasons for them existing, have gone too. They should go. Maybe in a thousand years what remains will be romantic ruins in the woods or grasslands. Anyway, fire is very useful.

21 Right Wing-nut October 6, 2010 at 11:23 am

Funny that with so many libertarians supposedly here, that the real libertarian angle was missed: the existence of an available opt-in fee service gutted the ability of the locals to form a volunteer service.

After that, this is a matter of an idiot getting what he deserved. In the heat of the moment, there was no effective way for the FD to negotiate an on-the-spot contract. Clearly, he was in hot water, and after the fact could have easily claimed that any such contract was forced.

What would have been better would be (as has been suggested), would be if the city FD have a published price (we’ll fight your out-of-network fire for $10,000).

This case does raise an interesting quirk of English common law: there is no legal requirement that you help your neighbor. Cops don’t have to respond to calls for help. Remember that, and keep your gun handy.

22 anonymous October 6, 2010 at 11:51 am

Andrew makes a good point. Fire spreads rapidly and often engulfs a building before firefighters can even get there; this is especially true when the building is mostly wooden rather than steel and concrete, and when the building is located in a sparsely populated area and the firetrucks have to travel a considerable distance.

In situations like this, a fire department ends up simply pouring water over a total loss (and whatever doesn’t burn, ironically, gets destroyed by water damage). The main purpose of their action is merely to contain the fire and stop it from spreading.

Some indignant commenters here are blithely assuming that the house would still be standing, miraculously undamaged, if only the firefighters had trained their hoses on it. That is very unlikely to be the case. It’s not worth an overwrought emotional reaction, given that the outcome (only property damage, after all, albeit total) amounts to the same thing either way.

23 spencer October 6, 2010 at 11:57 am

I guess I’m not really surprised by the comments here.

This is a pure free rider problem.

But it was discussed as a moral problem.

Historically private fire fighting developed first in the US but

was displaced by public fire fighting exactly

because the public would not stand for fire fighters not putting out fires just as we have seen in this situation.

I would love to see the comments
discuss if this is an example of a major problem with the libertarian philosophy.

24 Troublesome Frog October 6, 2010 at 12:19 pm

He should just go to State Farm and buy a bunch of fire insurance for his home. I’m sure they’ll make an exception and pay out right away.

25 Burble October 6, 2010 at 12:33 pm

Post-facto fee assessment (with a large penalty) seems like a much less destructive way of handling it.

26 Burble October 6, 2010 at 12:46 pm

Really though, the issue here is not “market vs. government”, but “fee vs. tax.”

27 Michael F. Martin October 6, 2010 at 1:16 pm

Jack Levin, in his treatise on Private Equity and Venture Capital, traces the earliest antecedent to venture capital to Rome, where a private fire department would show up at a burning house and demand payment for its services before proceeding.

28 Sbard October 6, 2010 at 2:12 pm

From what other articles on the matter have said, charging fees post-facto was tried before and failed because the government has no way to force people outside of its jurisdiction to pay for its services. They apparently used to charge a per incident fee, but very few people actually paid it and the city had no way to get the money, so they changed to a subscription basis. In addition, they send out reminder letters and make phone calls to all the people in their subscription service area reminding them of the dues. Third, this county has previously voted down proposals to fund rural fire service through a county tax. It turns out that decisions have consequences and Gene Crannick chose poorly. The city has no obligation to provide any firefighting service whatsoever to the residents of unincorporated Obion County.

29 Rich Berger October 6, 2010 at 3:58 pm

A major problem with libertarian philosophy? Apparently this is the second time this guy has done this (per Tom Maguire at JOM). Is it possible that his failure to pay the fee is connected with the fact that he has had two fires in the recent past? Or is it that he made the calculation, gambled on no fires and lost?

I guess I cling to a libertarian outlook out of some sentimental attachment. If I gave that up I could just come over to the world where government makes it all perfect.

BTW, Spencer, why don’t you just send the guy a check?

30 jeff October 6, 2010 at 4:54 pm

For a penalty rate to work in this situation, it would have to be extremely high. Suppose there’s a 1 in 1000 chance that any given house will catch on fire over a single year. Then suppose that everyone decides to save 75 bucks by not paying the upfront fee. The expected loss to the fire department is then $75,000 per thousand houses, less whatever the penalty fee is. Considering that the penalty fee agreed to in the heat of the moment (pun intended) may not even be collectable, it’s clear that it will have to be substantially more than $75,000 for the fire department to break even.

31 emerson October 6, 2010 at 5:42 pm

The fire department should have allowed the homeowners to pay the $75 fee late and then put out their house fire. Insurance companies shouldn’t discriminate on the basis of pre-existing conditions, including whether one’s house is already on fire when one tries to buy fire insurance.

32 heartless running dog October 6, 2010 at 7:21 pm

just belatedly saw emerson’s post with exactly the same arithmetic.

33 To October 6, 2010 at 10:04 pm

The fee-for service principle looks very much like a market mechanism implemented at the level of a local government. you can still very much blame the (monopolistic) “market”. The distinction between government and non-government seems largely metaphysical here.

Jeebus, you only see that in the US. In civilized places they will put out the fire no matter what.

Besides, you can’t possibly make philosophical arguments around something that happened in Tennessee ? I mean, Tennessee ?

34 James October 7, 2010 at 6:05 am

Why not privatize everything.
You want a new road?Only those who paid for it will use it.
You want new sewerage system?Only those who paid for can sh… in it.
etc etc etc…

Now suppose that in an area a big dam is built paid only by the people who live near by.The dam controls the flow of river water.100 miles away people doesn’t get any water cause they didn’t pay for the dam.They die.Well,they should have paid for it shouldn’t they?

So what you think of that?

35 Bill October 7, 2010 at 11:31 am

This case will get more interesting when the home owner’s insurance and mortgage companies get involved–wonder if and whom they will sue? It was a lot of their money that went up in smoke that day as well.

Not sure if this was the case with this homeowner but what would happen if the homeowner had simply forgotten to pay or the bill had been lost in the mail? Absent a signed waiver of coverage, we cannot assume that everyone who hasn’t paid has made the directed choice to opt out.

I can intellectually grasp the argument that not putting out the fire was fiscally prudent and will aid in bringing others in line. That said, I ask, “Why must we insist on monetizing EVERYTHING in our society?” Economists, financiers and insurers do so because that’s their jobs. Placing this thinking in the lead is often right but not always.

Downward defining every aspect of our lives to merely dollars and cents robs us of our humanity and replaces it with cold rationality. That may feed the bottom line but it also feeds the growing sense of isolation, discontent and determinism afflicting so many Americans. Our lives, personally and collectively, have a value greater than can be explained solely by economics. Stories like this may delight those who revel in theory but many of the rest of us just see evidence that we’ve lost something as a society.

36 Doxy October 7, 2010 at 4:28 pm

You people have clearly never lost your homes to a fire. When our family home burned in 1995, we lost everything. Sure, the structure and the furniture could be replaced—but all the family photos, the cherished letters and mementos, the Christmas tree ornaments, etc. could not be. Memories reside in things, as well as in people’s heads, and things handed down from previous generations and imbued with those memories are gone forever for us.

You people are also clearly economically privileged. Apparently, you’ve never been in a situation where $75 might be your grocery or prescription medication budget for a month–and the decision of whether to eat or be well had to trump whether to pay your fire insurance tab.

I really hope you folks never end up running the world. What a cold, cruel place it would be if you did! The only satisfaction I can imagine would come from watching you have to bear the most ruinous consequences of even your trivial mistakes–because that sword you wield so casually against your imperfect fellow humans cuts both ways.

37 Mark D. October 8, 2010 at 1:49 am

“Apparently, you’ve never been in a situation where $75 might be your grocery or prescription medication budget for a month–and the decision of whether to eat or be well had to trump whether to pay your fire insurance tab.”

Tough choices, but what about if you can’t afford your property tax tab or income tax tab? Is the government gonna forgive it to be nice?

38 Erika October 11, 2010 at 5:24 pm

Growing up, I was always taught that the service industries such as policemen, firefighters, paramedics, etc. were supposed to serve and protect the community to the best of their ability. It had never occurred to me that one of these groups would refuse to serve a member of their community because of money. My impression had always been that these people would always do what was right, even in the toughest of situations. I guess I was wrong.

Although the fire department from the story was a profit organization, I don’t understand why it would have been such a big deal for them to help the poor guy. Sure, it was partially the guy’s fault for choosing to take that risk and not pay his dues, but how much was the fire department really going to lose by putting out the fire? I’m sure that the cost to the fire department to extinguish the fire at the man’s house would have exceeded any revenue they would have made from the price he was willing to pay them at that moment. However, depending on what revenue the fire department was bringing in from its other customers, that total revenue may have outweighed the cost altogether, thus it would not have made much of a difference if the fire department decided to help out the non fee- paying customer.

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