Don't Pay Per Fire!
by Fred E. Foldvary, Senior Editor
Several huge forest fires are raging in the western States of the U.S.A., and an alarming aspect is that some were deliberately set by forest rangers and fire fighters. In many localities, contract forest fighters are hired when a fire breaks out. While contracting is usually a good idea, in this case, it is deadly. When one pays someone to fight destruction, there is a perverse incentive to create the situation in order to get the pay.
(Photo above is from infoplease.com)
According to infoplease.com, about one quarter of the forest fires are set on purpose. Two of the big fires this year were set by federal employees. The Arizona fire was started by an Apache Indian member of the firefighting crew that contracts with the Bureau of Indian Affairs. He has been arrested and charged with starting one of the Rodeo-Chediski wildfires, the largest ever in Arizona.
The devastation of these huge wildfires has been enormous, with lost houses, forests, and much economic damage. The Apache in Arizona depended on the timber. The lumber mill has closed down, and over half the nation's labor force there is unemployed.
While those who deliberately start fires should be held accountable and severely punished, the blame is also on the policy makers who set up the system of payment. If one pays people whenever there is a disaster, the economic incentive is to bring about that disaster so one can profit from it, since the cost is shifted to others. The only thing preventing this is moral character, and while that works for most, it will not work for all.
The market economy works the opposite way. People try to avoid paying for disasters. That is why people pay for insurance: you pay when you are not sick and don't have damage, so that when something bad happens, you will not suffer such a hardship. The federal government's policy of contracting with fire fighters when a fire occurs defies economic logic.
The firefighting crew should be treated like insurance. They should be paid a flat rate every month. They would be on retainer, and when there is a fire, they would get enlisted to fight it. Then the incentive would be the opposite of what it is today. The contractors would try to prevent fires, since they get paid whether a fire occurs or not.
Two ways to bring this change in policy would be: 1) make the federal agencies adopt a flat fee; 2) privatize the forests. Of these, the second one would be most effective. Paying the fire-fighters a flat fee would increase the operating costs. Even though in the long run it would save the costs of disastrous fires, the fires occur only occasionally, and when they do, the bureaucrats' jobs are not on the line. Indeed, disasters may put pressure on government to increase the budget. Government tends to respond to disasters rather than try to prevent them.
In contrast, when a forest is privately owned, the profits and value of the company are at risk. The firm will want to get insurance, and the insurance company will check for moral hazard, the tendency of the insured to take on greater risks. So the firm will tend to pay a flat fee for fire-fighters rather than risk more fires by paying them when a fire occurs. Firms which don't do this will lose their forests more often and go out of business. But governments do not go out of business; they just raise taxes higher.
A private firm will also take better care of the forest. The federal policy has been to prevent fires. This lets the growth of potential fire fuel - dead, dry logs and branches that litter the forest floor - grow to the point where, as today, a fire becomes a huge uncontrollable blaze. The native American Indians knew better. They set occasional fires to prevent this massing up of fire fuel. The fires also made the forests more productive. The federal government has started doing this somewhat, but this is more difficult now after 100 years of mismanagement.
Government officials and employees don't have the same incentives as in for-profit firms. They don't have a property stake in the forest and the wildlife. We therefore depend on their moral character. Most of the rangers and officials most likely do have a fine moral character, but it is unrealistic to expect all to have this, and the good folks there can get demoralized by having to endure poor policy decisions and lack of funding.
It is better to have proper economic incentives in the first place. We have seen recently that private enterprise too can get corrupted, the executives looting the company instead of working for the shareholder interest. But here too the proper incentives are lacking. Those who commit fraud and theft should be severely punished. Corporate charters should specify the basic policies clearly. These measures are not being done today.
Still, given the colossal failure of governmental stewardship over the forests, the best policy today would be to privatize them via long-term transferable leaseholds, with several conditions: 1) the firms would pay to the government the market rent of the forests; 2) the wildlife would be preserved; 3) any reduction in public access in areas that have been used for recreation would be subject to extra leasehold payments.
Private firms would be much more likely to prevent fires with wiser controls, since otherwise the insurance costs would rise and profits would fall, and then either the board would be replaced, the firm taken over, or the firm would fail. Government agencies do not get taken over or go bankrupt. That is the difference.
-- Fred Foldvary
Copyright 2002 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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