One of the main arguments that statists use to justify the existence of centralized government is the need for the provision of protective services. These services tend to include national defense, judicial services, and police and fire departmental services.
Cities and states are facing large budget crises which are forcing these governments to make difficult decisions. Many people are adamantly opposed to cutting any money from the budgets of police and fire departments. Few people stop to think that completely eliminating governmental funding for police and fire departments could result in a large increase in public welfare and safety, while at the same time achieving massive reductions in the size of (or even the eliminations of) local governments.
The argument for government provision of these services takes the name of the “free-rider” effect and is repeated in economics and public administration and policy programs throughout the country. The idea behind this argument is that if I were to purchase services from a fire department, but my neighbors choose not to, the fire department would likely put out a fire at one of their houses to prevent it from spreading to mine. Thus, my neighbors have paid nothing and have received fire protection for free. The supporters of this theory argue that over time, the numbers of “free-riders” would grow until the fire protection company could no longer make a profit and this would leave everyone in the neighborhood without protection from fires. Therefore, to counter the effects of the free-rider problem and to ensure that the neighborhood receives adequate fire protection, a central government must provide this services.
But, it is apparent that this is not a realistic scenario. Businesses are profit seeking enterprises and their owners are extremely unlikely to sit by and allow a free-rider problem to destroy their hard work.
Economists long assumed that there were certain goods which must be provided by the government in order to guarantee their provision in the face of the free-rider problem. One such good is the lighthouse. Economists and public administration professors love using the lighthouse as an example of good that cannot be provided by the free market, and therefore must be provided by the government. After all, lighthouse operators seemingly have no way of capturing revenue for the service that they provide. However, Roland Coase (a future Nobel Prize winning economist) demonstrated in 1974 that most lighthouses have historically been built by private groups and run for profit (and successfully so). While this might seem impossible at first glance, deeper thought on the subject revels how this profit is made. While it is obvious that the lighthouses cannot be profitable on their own, placing a lighthouse near a port and charging an additional port fee for the use of the lighthouse allows the owner of the port to provide the additional service and earn a profit for doing so. This process works in the same manner that McDonald’s is able to give away ketchup and other condiments free of charge by pricing these free products into the costs of their menu items. In short, bundling a necessary but unprofitable service with a profitable service is a great deal for both the customer and the consumer.
If we apply these same principles to the provision of police and fire protection, it becomes clear that these services could be adequately provided in a voluntary manner on the free market.
I must begin by reminding readers that in a free market where individuals are free to enter into voluntary agreements with other individuals as they see fit, there is no way to predict what the actual arrangements will look like. All we can say for sure is that the results of the process of voluntary exchange will accurately reflect the demands of the individuals that make up society. If a good or service is “under-produced” in such a society it is because the people have chosen to use their resources to purchase goods and services which they deem more important than the “under-produced” good or service. Thus if a community in a free society had minimal diets, but had an abundance of technologically advanced electronic products, we can only assume that the individuals in the society seem to prefer (ie, value) advanced electronic products over food.
A key component to free market provision of police and fire services is insurance companies. Homeowner’s insurance companies are a great vehicle for the bundling of many municipal services, including police and fire protection. Instead of paying the municipal government for the provision of these services, people would likely pay an additional premium to State Farm, Allstate, or whatever other company they use to insure their homes.
It is further likely that rather than every insurance company operating their own fire department, numerous fire departments would emerge throughout the country and in any given geographical region.
Bundling fire protection with homeowners insurance allows fire departments to continue to put out fires at my neighbor’s house (even though he has not purchased fire protection from his insurance company), while still granting me an additional level of services not given to my free-riding neighbor, and thus eliminating (or drastically reducing) the effects of the free-rider problem; one of the most profound effects of a truly free market which recognizes an absolute right to justly acquired private property is that it has the effect of internatlzing externaltites.
One possible model for the private provision of fire protection through homeowners insurance companies is the bundle model which I presented above. Under this model, a fire department would put out any fire in a neighborhood free of charge, regardless of whether or not the homeowner purchased fire protection insurance. At first glance, this may seem to increase, rather than decrease the problems of the free-rider effect, however, bundling fire protection with insurance actually serves to eliminate these problems.
This is true because the insurance company would pay to replace the damages to the home and other property of its customers, but would not do so for those who had failed to pay. Therefore, free-market fire protective services would offer everyone some level of support, but would charge customers extra fees for the service of being “made whole” following the fire. This service is likely to be highly profitable for both the insurance company and potential customers, as the cost of rebuilding a $200,000 home, filled with furniture, computers, televisions, and many other valuable goods is likely to justify spending a little extra money on fire insurance.
Because the insurance company would like to minimize its own risk, it is likely to take steps to prevent the devastating effects of fires. For example, insurance companies could save quite a bit of money by providing homes with complimentary fire extinguishers. Furthermore, just as car insurance companies offer discounts to teen drivers who enroll in higher rated driver’s ed courses, homeowners insurance companies would likely offer discounts to customers who passed fire safety courses.
Private provision of police services could easily work in a very similar manner. In this case, the homeowners’ insurance company would provide police paroling services to a paid customers. Again, the neighbors who did not pay for this service would reap the benefits of this service when the private police squad drove by their home during a patrol. Additionally, if an officer were to see someone breaking into the home of a non-customer, he would do whatever was in his power to stop the crime. There would likely still continue to be a 911 like number for people to call for police assistance, whether or not they were customers.
The bundling mechanism plays an important role in the provision of police services as well. For even though all residents of an area would be provided with a basic level of security regardless of whether or not they paid for the service, paying customers would receive additional premium benefits. It is likely that insurance companies who offered customers policing services as part of an insurance package would bundle these services with other services like a high-tech burglar alarms which instantly alerted the police about intruders. Similarly to the proposed fire protection bundle, insurance companies would offer their customers restitution for the damages caused by criminals. This restitution take place relatively quickly, as insurance companies would need to do so in order to preserve their reputations. Furthermore, this restitution would take place regardless of whether or not the police were able to apprehend and convict the perpetrator of the crimes.
But what of the areas inhabited by the poor which may not be able to afford to purchase any private police protection services? Well, this is certainly an important issue, but there is every reason to believe that the market will provide some level of security to these people. Just as volunteer fire departments are common in this country, there is no reason to believe that in a free market, volunteer police agencies would not spring up to meet the demands of impoverished people. We already see this somewhat, in the form of neighborhood watch programs. It is not hard to imagine that there would be coalitions of off-duty or retired police officers who would volunteer their services for impoverished areas. After all, doctors, lawyers, and other professionals currently do quite a bit of work for the impoverished on a pro-bono basis, and there is no reason to believe that police officers are any different.
Furthermore, homeowners insurance companies themselves might find it in their best interests to offer patrol services in these areas. What better form of advertising could there be for a firm which offered police services than proof that their most basic level of services drastically reduced crime in an impoverished and crime-ridden area? Providing potential and affluent customers with such a demonstration would be an excellent way to generate new business (as well as provide good will). Furthermore, providing such services would have the necessary result of increasing the property values in the affected neighborhoods, giving some of these residents the ability to sell their properties and use those funds to move to a safer area and purchase additional security for their property.
Furthermore, consumers are not likely to subscribe to a police service which forcefully restricts their lifestyles. For example, a marijuana user is unlikely to sign up with a police service which promised to arrest marijuana smokers who were using the drug on their own property. Thus, such a system would necessarily focus on real crimes–crimes against life, liberty, and property. Like all free market reforms, the privatization of policing will have the result of leading to a more prosperous society.
Unfortunately, this idea is not currently politically feasible. Yet, I am confident that as our local, state, and federal budgets continue to spiral out of control and the government faces a populace increasingly hostile to taxes, ideas like this will be brought to the forefront of the public discourse. It is important to lay the theoretical groundwork and describe how the market could provide for basic services like police and fire protection in the absence of governmental provision of such services. An idea must be first be born and then developed before it can be considered feasible. Following that, it must be discussed publicly as a viable alternative. Thus, the purpose of this article was not to suggest a change which I expect will be enacted or even debated in the near future, but rather to demonstrate the feasibility and workability of such a proposal in the hopes that some day soon the citizenry will take the necessary steps to move towards a truly free and voluntary society.
Please help me promote my site: