Clifford Winston Brookings Institution Can Markets Address Government Failure? The Case of Autonomous Vehicles Clifford Winston Brookings Institution

Government Microeconomic Interventions Correct Market Failures Market Power Natural Monopoly Imperfect Information Externalities Public Goods/Production Achieve Social Goals at Minimum Cost Evidence that government rarely achieves those objectives

Consider Highway Infrastructure Government owns, regulates, and manages the highway system The system is marked by growing congestion, crumbling pavement, structurally deficient bridges, and significant deficits Policy mindset is to increase infrastructure spending, but poor performance reflects government policy failures related to inefficient pricing, investment, production, and technical advance Can the private sector help?

Modes Lead Infrastructure Transportation modes have improved their performance and safety regardless of the state of their infrastructure Autonomous Vehicles: have the potential to prevent collisions and reduce regular and incident delays by creating a smoother traffic flow Benefits depend on market penetration—50% penetration could reduce congestion delays 50% and yields annual benefits to travelers of some $200 billion Benefits to the broader economy could be even larger

Measuring the Benefits to the Broader Economy Our basic model can be described as: G=f(C,X,ε), where G: growth rate of economic performance variable (employment, trade flows, wages, GDP) C: level of congestion (annual hours of delay per commuter) X: control variables ε: random error term (measurement error and unobserved influences)

Estimating a Casual Relationship Unobserved influences on a performance measure are likely to be correlated with congestion. Need to “purge” that correlation with an “instrument” that is correlated with congestion but not with a performance measure. I rely on natural experiments in the form of legislation to pass self-help county taxes. Some or all of the funds that are raised can be used for highway spending to reduce congestion, but passage is driven by politics.

Self-Help County Taxes Are Exogenous Self-help taxes were passed regardless of the state of the macroeconomy; not driven by earlier trends in congestion Self-help taxes are small and not likely to affect a county’s economic activity Congestion already existed in the CA counties before self-help taxes were introduced Advocates of self-help taxes are policy activists who plan that it may take several years to mobilize support

Estimation I use my instrument to estimate the effect of congestion on: Wages Employment Trade Flows GDP for California counties (1982-2011), controlling for other influences. The estimated parameters are used to explore the benefits of reducing congestion by adopting autonomous vehicles.

Counterfactual Analysis for Assessing Autonomous Vehicles Recall, Log(G) = β * log (C) + Xδ + ε Given a scenario about autonomous vehicles, the post growth rate is: Log(Gpost) = β * log (C • (1- α)) + Xδ + ε, where α is the percentage reduction in congestion caused by adopting autonomous vehicles Thus, we can express the post-scenario growth rate as: Gpost= G • exp (β * log (1- α))

CA Results: Autonomous Vehicles Reduce Congestion α= 50% Jobs Increase in Annual Growth +jobs 2011 1.7% 345,546 GDP Increase in Annual Growth +GDP 2011 1.8% $35.4 billion Wages Increase in Annual Growth +Wages 2011 1.24% $14.5 billion Freight Flows Increase in Annual Growth +Freight 2011 7.6% $57 billion

Results for the United States Autonomous Cars 80% of Gains Jobs 3 million 2.4 million GDP $267 billion $213 billion Earnings $112 billion $90 billion Note: additional gains from improving the reliability of travel

Comments Autonomous vehicles can address government failure by significantly reducing congestion The benefits are substantial, indicating that the costs of government failure may have been vastly underestimated Government’s role is to expedite introduction of the new technology Autonomous vehicles would perform better on highways that operate more efficiently That may eventually occur only if the road system is privatized