More Houses on Fire
David Henderson has another post on the fire department that let a house burn down because the owner had not paid his fire insurance fee. David’s post is in response to Paul Krugman and follows on the heels of his previous post. Marginal Revolution and yours truly also weighed in. The comments at Econlog are also worth reading.
What’s surprising is that all these economists are missing some routine economic analysis. Problem solved below the fold.
It’s not socially optimal to let a house burn down if the cost of prevention is less than the cost of the inflagration. On the other hand, allowing people to get benefits they do not insure for would destroy the possibility of voluntary insurance.
The answer is to create a different institutional arrangement. Perhaps the fire department could claim ownership of the property it saved that otherwise would have been destroyed. That would give the fire department a property right in its good deeds.
As for health care (a Krugman analogy I also used in my original post), something similar should also be institutionalized. Providers of emergency and life-saving care should have a claim against the assets and income of the people they help. And if that’s not enough for the rest of us, we can chip in and create safety-net institutions to provide charity care.
That’s largely how the health care market already works — but very imperfectly because of bad government policy. A much better way to do it is explained in my Do No Harm Approach to Health Policy.
Great photo. Looks like it could be the very house in question. There are no firemen in the photo.
I like your solution. It seems obvious once you think about it.
Ditto Joe’s comment. Brilliant solution.
Look at the lower right hand corner of the photo. Isn’t that a fireman watching the house burn?
I like the solution. There might be disagreement over what would have happened had the fire department not intervened, but there could be special courts to resolve those issues if necessary.
Brilliant solution. I’m surprised all these other economists didn’t think of it.
It’s interesting how often institutional failures in other markets help illuminate similar failures in the health care marketplace.
So what happens to people with no assets or income? Let them die?
Once people realize there is no “free market” economy in the US we can get serious about solving our problems.
Erik, what solution do you suggest? Should everyone’s income belong to the government and be spent according to bureaucratic caprice? Would that solve “our” problems?
“The answer is to create a different institutional arrangement. Perhaps the fire department could claim ownership of the property it saved that otherwise would have been destroyed.”
The unintended consequence then, would be people less likely to call the fire department. If you are going to lose everything, why call? Much better to risk the fire burning out and leaving something. That would increase the likelihood of fire spreading. Probably better to have a pre-existing published policy letting people know that if you call, response will come only if they paid more than the costs of responding plus a substantial profit. A lien could be placed against the property if not paid.
Steve
Steve, if you don’t call the fire department the house burns to the ground and you get nothing. If you do call and there is salvage value then there are assets for you to argue about in determining how much difference the fire department made.
But let me concede the point for the sake of argument. We can let the fire department have a 90% claim or 80% or 75% of whatever it saves. That would preserve positive incentives for all parties.
Well John, why just fire departments? You sign a big deal over lunch, you now owe the restaurant a percentage of the profit. A taxi driver gets to a big meeting on time, you now own him a percentage. Or the fire department shows up and you start to negotiate how much you’ll pay for them to save your house, sort of uber austrian game theory experiment. When I was a sophomore in college in the 70s, late at night with the help of wine and weed, we had the same sort of ludicrous discussions, I’m glad you’re holding up the tradition.
artk, what is missing from your amusing comment is the concept of marginal product. As a rule, taxi drivers and restaurants are already getting their marginal product — what they contribute to final output at the margin. In the fire example, we have a net social loss because institutional arrangements do not currently allow the firemen to get the value of what they can potentially produce (a saved house). So I was proposing a way to make that happen.
And no. I am not suggesting negotiation at the point of the fire. Although we certainly would not want to forbid that. I am suggesting that we create in advance a property right for the firemen in the uninsured buildings they save.
John, your fire department idea is 2,000 years old, it was considered distasteful even in ancient Rome.
http://classics.mit.edu/Plutarch/crassus.html
Linda,
That is exactly what is happening today under the disguise of Free Market Capitalism. Don’t think so, then why did TARP appear when Free Market forces dictate that those banks should have failed. Now both you and I have to pay for this failure.
Where is the free market here? It is really cost externalization which corporate America is more than happy to do (private profit with public responsibility – mortgage fraud anyone?), where as in a free market, a corporation could not externalize those expenses, they would have to absorb them as part of their business model which would eat into their profit and corporate America cannot have its profit siphoned off just because they destroy our economy, the environment, etc.
You see, free market gurus are really Fascists and we all know how well that movement went.
So to answer your question directly I would end American fascism and the rest will work itself out.
Arnold Kling has an interesting summary of the history of private fire protection at Econlog here:
http://econlog.econlib.org/archives/2010/10/history_of_fire.html
Last September I wrote about whether medical care the fire department are public goods.
I concluded that if they ran fire departments like they want to run health care, the government would “force you to live in a house that the U.S. Department of Housing and Urban Development (HUD) chose for you, with furniture appropriate to the age and mobility of your family’s members. You wouldn’t be able to decorate it yourself, even using your own money, because you might use something unaccounted for by the government planners who estimate the liabilities of the national homeowners’ insurance plan.”