Could local fire departments be privately operated, with their services sold directly to customers? What problems would be involved in such a system?

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This would not really work because, for the most part, fire protection is a public good.  It is not really possible to provide it to one household without providing it to others.

It might be possible if all the houses were single-family houses and if they were so far apart that a fire from one could not possibly spread to another.

But in a city, it would be impossible.  You can't sell fire protection to Apartment 101 and deny it to 102.  If you save 101 from burning, you're going to save 102.

So, a fire department like the one you describe would have a hard time selling its services due to the free rider problem.

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