Incentives for wildfire risk management

Changing demographics in fire-prone areas coupled with rising fire expenditures make wildfire risk management a growing policy concern. Today, roughly 38.6 million people live in fire-prone environments, resulting in an average of 900 structures destroyed each year, escalating fire suppression expenditures, and increasing threats to public safety (ISO 1997; Sampson et al. 2000; Cleaves 2001). These trends can be seen as a consequence of the choices people make about where to live and how to behave, within their chosen natural and social environment. Those living or working in fire-prone areas have heard the warnings before: invest in fire-proofing your home and property; create defensible space around your property; don’t move into high-risk areas. These statements are often predicated on the presumption that people tend to be more careless than they should be in terms of reducing wildfire risk before fires happen (Hodgson 1995, Kovacs 2001, Brenkert et al. 2005).

This article takes an economic perspective on wildfire risk management by focusing on the incentives for risk management and the extent to which these incentives could be improved through various policy approaches. Based on a broad definition of economic value and welfare that extends beyond market values and financial wealth, we examine the sense in which people might be too careless, the extent to which they might be too careless (in general terms) and we suggest ways to change incentives through alternative public policies and insurance markets to better align peoples’ behavior with the risks they face.

Specifically, we examine two basic activities undertaken by property owners: the choice to move into fire-prone areas such as the wildland-urban interface (WUI), and the chosen levels of investment in fire risk reduction by people living in these fire-prone areas. We examine three sources of problems that may induce too little private risk mitigation from an economic societal welfare perspective: a) the fact that wildfire extends beyond private property boundaries, b) the traditional structure of insurance coverage for wildfire losses, and c) public fire suppression and how it is funded (and how it is not funded). Finally, we provide an economic perspective on the use of some general policy and market alternatives for improving wildfire risk management incentives, including contingent wildfire insurance policies, vegetation management subsidy programs, land assessment programs designed to address excessive development in fire-prone areas, and the economic interactions among these policy alternatives.