Via ThinkProgress, comes a story more or less guaranteed to make it into a textbook of economics. The story runs like this:
...last week in Obion County, Tennessee. In this rural section of Tennessee, Gene Cranick’s home caught on fire. As the Cranicks fled their home, their neighbors alerted the county’s firefighters, who soon arrived at the scene. Yet when the firefighters arrived, they refused to put out the fire, saying that the family failed to pay the annual subscription fee to the fire department. Because the county’s fire services for rural residences is based on household subscription fees, the firefighters, fully equipped to help the Cranicks, stood by and watched as the home burned to the ground:
Have a look at the video:
So: on the subscription model of public services like fire-fighting, if your home burns down, you will not get a drop of water from the fire service unless you pay the bill. The service acts exactly like an insurance policy, which we covered in week 3. On the other hand, we do have the possibility of a waste of resources, negative externalities like pollution and heat, not to mention life, from this frankly crazy policy. Personally I'm happy to pay taxes to help pay for someone else to get their home put out if it's on fire.
Sad story indeed. The County doesn't have their own FD, so the town next door makes them subscribe to their FD for $75/year.
Good discussion and comments on this here:
County Resident Declines to Pay For Fire Protection and Then His House Catches on Fire... http://j.mp/d4sioW
Cheers for the link!
Just got back from Tennessee this afternoon as it happens, & mighty fine people they are too, y'all hear?
So whats so crazy about the policy: they knew the risks, didn't they? Its easy to bring in possible externalities to justify anything but the primary beneficiaries would be the home-owners and either they weren't bothered or thought they could free-ride. Ha!
A work-around would be an "AA" type arrangement whereby if you call them out and you are not a member you join for a higher fee. This is assuming your cheque book hasn't gone up in smoke, of course.
This is an fantastically polarizing story, though I confess I find myself on the side of the fire fighters.
Look at the possible options:
1. Mandatory fire services funded through tax.
Pro: Volume subscription means individual costs are lower.
Pro: Environmental externalities are avoided.
Con: People may not want to pay for fire services (absurd you say? That was what happened. Obviously fire protection is a good thing, but perhaps the family got greater utility from that $75 by spending it on something else, a choice (and risk) they are free to make.)
Con: Supply/Demand is short circuited so the market cannot dictate resource allocation (e.g. how many firetrucks per person?)
2. Private fire services (if you read the article, the residents of this county are essentially contracting the fire services from another county, making it private-ish)
Essentially the reverse of the above, do you trust your city administrator the determine the 'correct' amount of resources to allocate to fire services or do you trust the market? If you don't go with the market, how do you encourage innovation in fire fighting technologies?
I was initially confused as to why, when contacted, the fire service would not put it out when the family offered to pay 'whatever it cost', but if you think that system through, no one would pay the insurance as they would feel confident it wouldn't happen to them; and if it did then they would pay. But keeping fire crews on standby is a continuous cost and would be very hard to maintain if they only got paid per fire.
Hi Kevin,
I confess it is hard to feel sorry for someone who burns stuff near his house, and admits openly he thought they'd come if he really needed him, so he was happy to free ride (as he saw it).
The free market aspect of this has been overplayed in my opinion---think what would have happened if someone was hurt in the fire, or if the fire had spread beyond control. Here the only thing that is different is that the people involved accept their culpability. The firefighters could have put the blaze out for a fee I'm sure. The guy would more or less have agreed to pay anything. But then we'd have to think about the rights and wrongs of that. It's not your car that's broken down, it's your house burning down! So not much chance you'll haggle to get a good price.
@Hugh,
Well reasoned out post, thanks. Of course now not one person in that county will miss a payment if they can possibly afford to, but I'm not sure the (potential) harm caused really fits an economic story so neatly. This would after all be a very different story had someone been hurt badly.
They should have put out the fire and then charge your man a small fortune for doing so. Way more than the subscription fee.
@ Mossy, yes, clearly both parties would be better off if they'd screwed him to the wall and gotten, say, a thousand off him there and then to put out the fire. But, they may make even more than the thousand, because everyone will now pay their subscription, presumably in perpetuity, because of the example shown here. So it may be a 'loss leader'.
Some points:
I paged through a lengthy presentation prepared for the good people of Obion County about two years ago.
There are 8 municipal fire departments providing service for their own taxpayers and the outlying rural areas (which pay no taxes).
5 of the towns charge the rurals only in response to a fire - the bill is $500, and they collect about half the time (apparently they have no legal enforcement mechanism.)
The other 3 towns are trying to impose a bit of predictability by offering fire protection by subscription, in this case, $75.
2. There are free rider and moral hazard issues subject to some caveats:
(a) in town, one might imagine that fires must be fought, since my neighbor's house on fire endangers mine; since all benefit from the service, all ought to pay.
(b) In rural areas, it is far from clear that there any such externalities - the South Fulton FD showed up becasue the field fire was endangering a subscriber's home, not because the house on fire was a hazard to others.
(c) Does anyone in Obion have any media training? Having fire trucks sit by idly while a house burns, or having them fight one fire while ignoring another, will never look good.
On the insurance side, this is a real puzzle - per a different article, the insurance company includes a rider saying it doesn't have to pay if the homeowner declines fire service. However, it rarely comes up and is never invoked (so they will pay off here.)
And a further puzzle - the insurance proceeds will be enough to cover the mortgage. Fair enough; prior to the housing debacle, I would have assumed that mortgage lenders require basic fire and flood insurance.
But my bafflement - why wouldn't the insurance company simply build the $75 subscription into the cost of their policy and write the check to the town themselves? What idiot insurer would leave open the possibility that the homeowner hasn't paid/forgot to pay/ won't pay the $75?
And the same question to the idiot mortgage lender - wouldn't they want to pin down the fire insurance question?
Hi Tom,
Excellent post, thanks--this has puzzled me too--why not simply bundle the fire subscription into the insurance policy as mandated by the mortgage company? One line of regulation and this might all have been solved. It is also interesting that Mr Crannick's insurance policy will cover the destruction of his home while they are perfectly aware he hasn't acted in the best interests of the house.
Your point a. is also very interesting. How would you ensure automatic payment? If you could do this, then why not roll it out to the county?