The Relevance of Law and Economics for Fire Safety

This article investigates how the discipline of Law and Economics ("L&E") can guide legal frameworks for fire safety by aligning legal rules, economic incentives, and engineering practices. We first introduce core L&E concepts - externalities, information asymmetries, public-goods, and liability structures - and their relevance for fire safety. We then develop a mathematical model for the total cost of fire (for a design problem or building portfolio), and use this model to contrast prescriptive and performance-based regimes and compare three liability standards (strict liability, code-compliance negligence, and due-diligence negligence). When considering a full internalization of the cost of fire (i.e., when the private decision-maker carries all fire-related costs), our analyses show that prescriptive regimes generate over- or under-investment in preventive measures, resulting in sub-optimal societal outcomes. Performance-based regimes, on the other hand, provide private decision makers with the incentive to invest up to societally optimal safety investments. The comparison of liability regimes shows that the internalization of the cost of fire is most effectively achieved by the strict liability regime. A liability regime of negligence based on due diligence (professional standards) also pushes private decision-makers towards adopting societally optimum designs. However, when negligence is established by the (lack of) compliance with prescriptive fire safety codes, this results in societally suboptimal designs. These results imply that policymakers should favor adaptable, efficiency-oriented regulatory designs, and highlight that liability regimes should be calibrated to internalize fire safety related costs. In more general terms, the results demonstrate the power of L&E approaches for supporting discussions on fire safety legislation.