[MUSIC] One of these things is not like the others... one of these things doesn't belong... [/MUSIC]
["Car Insurance" expands to fill the frame]
Liability coverage for driving on the same roads as everyone else is another example where external costs and benefits (i.e. the risk of totaling someone else's car, or worse). That is why it is not, in fact, treated as a free-market commodity to be accepted or rejected at one's discretion -- if you drive on the public roads, you buy car insurance or you incur legal penalties. (Driving only one one's own property avoids the externalities issue, and in that case insurance is not required.)
It is interesting that you use the car insurance example for driving on public roads as analogous to this situation, especially when you point out that if one limits one's driving to one's own property the externality issue is avoided. It is the private property rights and responsibilities relative to externalities that makes this situation so interesting AND that also makes it interesting that you are taking a position pretty much opposite of the libertarian and free market positions that you appear to usually espouse.
1. The residents of this rural, unincorporated area CHOSE to buy property in a rural unincorporated area that did not have any kind of fire department. By making this choice the residents chose to live in a place and situation where they must assume responsibility for protecting their own property from fire OR must form some kind of cooperative among themselves for fire protection OR must make arrangements to obtain fire protection from another party such as a nearby city or a commercial fire protection service.
2. The nearby city was not obligated to offer service outside of its boundaries, but in response to the request of the rural residents, the city offered to provide services to those residents who paid an annual fee for fire protection. Economically, this is a losing proposition for the city as the potential costs and liabilities of responding to just one fire outside its boundaries probably exceeds the combined annual fee revenue from all the participating rural residents, but for whatever reason the city fire department agreed to extend this service.
3. The residents who CHOSE to own rural unincorporated property therefore also made a CHOICE as to whether or not to avail themselves of the fire protection services that had been extended. People CHOOSE where to buy property and base those choices on several different criteria. Rural property typically has fewer government services than urban or suburban properties. Rural property owners accept certain responsibilities for providing those services for themselves as a result.