I'm wondering what are the implications of allowing competition between firms that deal with essential services in public welfare. I.e assuming there is no government regulation of such services, what would happen if there was competition between firms in the policing industry or if there was competition allowed among different fire departments?

What would the industry look like and what kind of methods would we use to analyse such a situation?

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    $\begingroup$ You might want to investigate early fire services established by building insurance companies, who only put out a fire if the building was covered by their company (and had the company mark on its wall), for example in London before 1833. $\endgroup$ – Henry Aug 7 '16 at 9:01
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    $\begingroup$ Relevant timesnews.net/News/2010/10/05/… $\endgroup$ – EconJohn Apr 4 '17 at 16:12
  • $\begingroup$ @Henry Thanks for the link. "If a building was on fire, several brigades would attend; if they did not see their specific firemark attached to the building, they would leave the property to burn" : this looks like something non optimal. Maybe the neighbourhood level would be more adequate than the building level ? $\endgroup$ – Ululo Jun 3 '17 at 18:05
  • $\begingroup$ *level -> scale $\endgroup$ – Ululo Jun 3 '17 at 18:43
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    $\begingroup$ @Ululo - that is the political trilemma when there are economies of scale: you have to choose between the inefficient duplication needed for competition, the abuse of market power by a commercial monopoly, or the possible misdirected priorities of a municipal or public service. $\endgroup$ – Henry Jun 3 '17 at 18:58

As already suggested in the comments of the OP, we find cases where the provision of essential services behave much like any other market when privatized.

As suggested by Henry it was found that in the case of fire fighters, they simply let the homes burn down. On the London Fire Brigade's Website they discuss the issue in question with great detail.

People paid a fee to an insurance company to insure their property against damage. The most common risk at this time was fire. The first insurance company was named Phoenix, after the Greek mythological bird that rose from the ashes, and was established by Nicolas Barbon.

Building insurance was very profitable and many more insurance companies were set up with the insurance companies establishing their own fire brigades. These brigades were sent to insured properties if a fire occurred to minimise damage and cost.

Firemarks were used to identify - and advertise - different insurance companies. They were placed on the outside of an insured building and brigades would use these firemarks to determine whether a building was insured by them. If a building was on fire, several brigades would attend; if they did not see their specific firemark attached to the building, they would leave the property to burn. You can still see some old firemarks on buildings today.

Similarly we in 2010 there was a case of Tennessee firefighters letting a home burn when the owner didn't pay fire-protection fee. Its clear that if an essential service is allowed to be privatized, they will function like any other business.


One thing that comes to mind is the issue of motives - i.e. if there is competition in an essential service such as a fire brigade, and these rival brigades are competing by price (by assumption) and looking to maximise profit, then there could be a trade-off between what is socially optimal and what is optimal for the firm, i.e. how the firm maximises profit.

This may be difficult to quantify but let's imagine residents of a neighbourhood are surveyed and the overwhelming response is that they feel there aren't enough fire trucks in most neighbourhoods. On the other hand the fire brigade may make a loss if it were to provide any additional trucks.

  • $\begingroup$ Well, in your example, if the demand for trucks is there, then prices could rise and they could pay more, and the fire department could add more trucks. You want to more explicitly demonstrate an externality in this problem. $\endgroup$ – Kitsune Cavalry Dec 4 '16 at 4:09

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