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

2. 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

3. 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?

4. 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

5. 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)

6. 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.

7. 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

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

9. 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))

10. 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

11. 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

12. 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