Wednesday, 19 July 2017

Why fire protection is (or was) a club good

Goods and services can be categorised on two dimensions: (1) whether they are rival, or non-rival; and (2) whether they are excludable, or non-excludable. Goods and services are rival if one person’s use of the good diminishes the amount of the good that is available for other peoples' use. Most goods and services that we purchase are rival. In contrast, non-rival goods are those where one person using them doesn’t reduce the amount of the good that is available for everyone else. Listening to the radio is a non-rival good, since if one person listens, that doesn't reduce the number of other people who can also listen.

Goods and services are excludable if a person can be prevented from using or benefiting from them. In other words, there is some way to exclude people from using the good. Often (but not always), the exclusion mechanism is a price - to use the good or service you must pay the price. In contrast, non-excludable goods are available to everyone if they are available to anyone - there isn't a way of excluding people from using or benefiting from the good or service. A fireworks display is non-excludable. If you let off fireworks, you can't easily prevent other people from seeing them.

Based on those two dimensions, there are four types of goods as laid out in the table below.

I want to focus this post on club goods - goods (or services) that are non-rival and excludable. With club goods, often the exclusion mechanism is a price - you have to pay the price in order to be a part of the club (and receive the benefits of club membership).

Some goods or services that are categorised as club goods may be contentious. For instance, according to the table fire protection is a club good - it is non-rival and excludable. Provided there aren't large numbers of fires, if the fire service attends one fire, that doesn't reduce the fire protection available to everyone else [*]. So, fire protection is non-rival. Is fire protection excludable? In theory, yes. People can be prevented from benefiting from fire protection. Say there was some sort of fire service levy, and the fire service decided to only respond to fires at homes or businesses that were fully paid up. For the same reason, tertiary education is also in many cases a club good. [**]

I always thought that fire protection as a club good was purely a theoretical case, but this recent Mac Mckenna article notes:
Since 1906 the Fire Service has been universally available to all New Zealanders. Prior to then, the Fire Service was run by insurance companies to mitigate loss. Firefighters would only respond to save houses which had a red rock outside showing the owners had fire insurance cover.
I was a bit surprised by this piece of history, and I haven't been able to confirm it from another source. But it does demonstrate how fire protection at one point was excludable in more than just the theoretical sense, and therefore it was at that time a genuine club good.

However, in practice the government chooses not to exclude any home or business from fire protection, making it non-excludable, and therefore a public good. Of course, non-excludability comes with problems such as free riding (where a person benefits from the good or service without paying for it). As Mckenna notes, by funding the Fire Service by levying only those who take out insurance, the insured will be subsidising the free-riders who choose not to take out insurance.


[*] Of course, in a large-scale disaster, or in summer when there are large forest or bush fires burning, this may not be true.

[**] Tertiary education is a club good provided it is non-rival. For most university and polytechnic courses, this is the case. However, some courses have limited spaces and in the case of those courses tertiary education is a private good (rival and excludable).

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