The fire extinguisher is used by the crew to put out nearby fires. Whenever a fire is present, any nearby unoccupied crew member will path to the extinguisher, pick it up, and will go to the fire to put it out. Fires may be started by a Standard Cannon or a Large Cannon.
Fire Extinguishers are often disregarded and not included in ship designs, the problem with that is the Ion Beam , the Standard Cannon , and the Large Cannon can cause fires. (Cannons have a 20% chance to light a fire per tile.) All Weaponry, all Munitions, and Reactors have a chance to explode and start a fire. (unsure about sensors) Fires do not go out unless you use a fire extinguisher or what was aflame was either repaired, or what was burning was destroyed. (This sometimes stops fire expansion) Fire will kill crew after prolonged exposure.
Minimizing Fire Chance/Damage
Have fire extinguisher everywhere they can fit, just because you have 3 fire extinguishers doesn't mean your ship has 3 Reactors!
But wait, that's not all, you could attempt to minimize blast radius of an explosion to decrease fire chance SIGNIFICANTLY. Through testing I have learned that the more open the area around the part, and the amount of Ammunition in that part factors into the explosion. For example, a Reactor with 0 power cells in it will not produce a blast as big as a Reactor with 8 power cells, this stands for weapons and ammo storage as well, so if you produce enough ammo to keep a constant fire rate but nothing in your reserves, you could in theory be lowering the chance for fire. Now back to the area around the part, A part cannot inflame thy, because Walt was nice. "What in the world did you just say stupid Wiki person?" This: When a part is explode ONLY a direction where a door is facing will be counted for fire spread. You would armor up a Ammo Factory so imagine a "Technical Difficulty" caused it to explode, how would you extinguish your hull? You can't. So Walt's reasoning here is: If their is a door, their is a hallway/structure their to meet the Ammo Factory, then the crew clearly has access to it (if they don't then you created a dumb dysfunctional ship --Walt's brain) so this Ties into efficient door placement. WAIT HOLD UP... I... uh, I sort of forgot about that didn't I. Well Fire spreads through doors (and corridors), so the more doors on a room the more fire that can spread, so you really want to nail that efficient door placement. (As few door's as possible, but maximum efficiency, please don't make me add this to the crew page... fine later)
--Disclaimer: Walt's brain did not speak to me, nor provide that quote