Economics in Two Lessons: 21st century cars

My central claim, in writing Economics in Two Lessons, is that most economic policy issues can be understood in terms of opportunity costs and their relationship to prices. I was talking about 21st century (electric and self-driving) cars, and several of the issues that came up illustrated this point very neatly. Among the objections to 21st century cars are the following

  • Since 21st century cars don’t use petrol, governments will lose the revenue needed to fund the road network
  • Self-driving cars will cruise around cities to avoid paying for parking, thereby increasing congestion
  • Because of the limits of AI, self-driving cars will inevitably kill people

The answer to the first two questions is the same. These problems arise because prices don’t reflect opportunity costs. Opportunity costs arise from cars using the road network, reducing access to others, and from the initial construction of the network, consuming land and resources that could be used for other purposes.

Under current conditions, petrol consumption provides a rough proxy for general road use, while parking charges provide a rough proxy for road use in urban areas, shopping precincts and so on. That relationship breaks down with 21st century cars.

But, this is a self-resolving problem. The reason we used petrol taxes and parking charges was because charging for road use was too hard. With 21st century cars, it’s trivially easy. We can set prices exactly equal to opportunity costs, taking account of time-varying congestion and any other factors we want to.

The dangers of 21st century cars can also be understood in terms of opportunity costs. The question isn’t whether they are perfectly safe, but whether they are safer than the next best alternative – the current mix of human drivers, including the large proportion of incompetents, drunk and drugged drivers.

A side issue that has just occurred to me: is it possible to steal a self-driving car with no manual override? It seems a bit like stealing a train.

74 thoughts on “Economics in Two Lessons: 21st century cars

  1. Unless you are willing to jack a self driving car off its wheels and carry it away in a Faraday cage, they can’t really be stolen if they don’t have manual controls. And even then you’d have to expect it to start shouting, “Help! I’m being stolen!” so you might need a sound proof Faraday cage.

    It’s very hard to steal a car these days without the keys unless it’s pretty old. Tesla Model 3 cars have a camera built above the rear view mirror. It’s going to be pretty difficult to get away with stealing one of them. (Once the software for it is ready — which it isn’t.)

  2. Slightly OT, but better here than on the general message board. A reputable Indian newspaper teports that the Indian government is seriously considering banning the sale of non-electric two-wheelers from 2025 and, astonishingly, of non-electric three-wheelers from 2023.(*******/cleantechnica.com/2019/05/30/india-may-allow-sale-of-only-electric-two-and-three-wheelers-from-2025/) If they are doing this, it means there is no serious price penalty, which would create massive pollitical blowback.

    The rise of the e-tuk is an advertisement for laisser-faire, as the sector enjoys trivial policy support. The very low fuel costs for such light vehicles, and high reliability, are a big selling-point for their pretty poor owners. India already has 1.5 million etuks. A very lucky break.

    On AV safety. The irrational but real overweighting of personal control in rating risks argues for a much higher safety standard, comparable to those for planes and buses. I guess that AVs will need to be 100 times as safe as human-driven vehicles.

    Traffic deaths in the USA today are 35,000 a year IIRC, apparently a socially acceptable rate. That would mean that on my standard AVs could kill 350 Americans a year, a number in the same area as deaths on commercial planes, buses and trains. If you disagree with 100x, and think 10x will do (as it should in any utilitarian calculus), tell me: do you think that Tesla and Nissan etc could get away with 3,500 deaths a year attributable to the failure if their automatic systems?

  3. Surely though the first step ought to be to eliminate direct subsidies before taxing indirect ones? We could reduce the foreign car company subsidy budget (ie the state and federal metro road budget) to nothing and eliminate other subsidies in zoning law like single family zoning for free with only positive upside. More or less nobody would be worse off and of course this would also free up perhaps 10bn in QLD that could be spent on transport or on rural roads, while reducing racial segregation, solve the housing crisis, massively reduce carbon emissions and so on.

  4. Why is “the next best alternative” what we have now, rather than buildings & transit that allow more people to live without cars?

  5. Life in Queens, we can and should do as you suggest. I say that as a commuter cyclist and public transport user who has never driven a car. However, even in the best scenario that we can realistically imagine, there would still be an irreducible minimum of journeys that people would need to take by car

  6. “I guess that AVs will need to be 100 times as safe as human-driven vehicles.”

    I made exactly the same guess in a comments thread at Crooked Timber

  7. “A side issue that has just occurred to me: is it possible to steal a self-driving car with no manual override?”

    I agree with Ronald, not really. But any device that can jam the mobile frequency range can easily and effectively disable the car, without requiring a Faraday cage.

    In fact – walking on to the street and standing in front of the car is enough to disable it. That’s a much bigger conceptual challenge to grapple with. Car jackings on secluded roads become infinitely easier. Pedestrians stop bothering to wait for green walk signals etc.

  8. James: “do you think that Tesla and Nissan etc could get away with 3,500 deaths a year attributable to the failure if their automatic systems?”

    Not, but it has very little to do with “irrationality”. The reality is they would be sued out of existence.

  9. Opportunity and missed opportunity …

    “Australians could have saved $1.3 billion in fuel if these standards were introduced ”

    https://thenewdaily.com.au/life/auto/2019/05/30/petrol-price-australia-save/

    “Vehicle CO2 emissions legislation in Australia – brief history in international context

    “The available evidence suggests that legislative action regarding vehicle CO2 emissions is 1) overdue in Australia, and 2) needs urgent attention by the Federal Government to ensure total CO2 emissions from road transport are in fact reduced.

    “One final remark – introduction of mandatory vehicle fuel efficiency and/or CO2 emission standards in Australia should ideally be considered in the light of other (supplementary) policy measures such as fleet measures (e.g. zero emission vehicle policy in California, EV promotion), information campaigns, fuel/mileage taxes, and so forth.

    “Basically, a ‘whole system’ approach to ensure cost-effective reduction of total CO2 emissions from the on road fleet. ”
    https://docs.wixstatic.com/ugd/d0bd25_0e5b82c440c7482a8e0d645f2d931f57.pdf

  10. Levying congestion charges will get rid of the first two problems you mention. Road accident costs seem to be approximately proportional to distance traveled and are often external costs in the sense that about 70% of such accidents involve a second vehicle. Such externalities are large and can easily be captured again using pricing.

    These are nice features. But overall the big gains are that we can commute about our cities with socially-efficient levels of congestion. Travel times will be reduced, quick emergency trips can be obtained by paying a road charge that you might not be prepared to pay to meet your friend in a bar and the variance of travel times can be reduced giving greater efficiency in the scheduling of our lives.

    Finally, using efficient pricing we can also make efficient road supply decisions because we will no longer be trying to meet excess demands for travel at a zero price. Profit signals on individual roads and across road networks can be used to drive road expansion decisions – much better than politicians making expensive promises at election time in marginal electorates.

  11. Two questions regarding congestion pricing:
    1. How is congestion pricing meaningful on Australia’s vast rural and outback areas? (Last time I travelled via the Pilliga to Coonamble I saw 4 cars before entering Coonamble.)
    2. How is congestion pricing (and for that matter ‘opportunity cost’) related to the rather unequal income distribution within urban areas and between urban and rural areas?

  12. Add to / alter Ernestine’s question; “2. How is congestion pricing (and for that matter ‘opportunity cost’) related to the rather unequal income distribution within [ society & geography & demography ] urban areas and between urban and rural areas?”

    Brave / foolish of me! Feel free to correct my bias or comprehention Ernestine / commenters.

  13. Stealing an autonomous car can be done several ways, only one of which is the Australian “I took this, it’s mine now” brute force version. Increasingly with modern electronic keying the tendency is to burgle the house or less often mug the owner, only taking the vehicle once thieves have the keys. Much less common are technological attacks, and even those are normally dumb radio repeaters rather than hacking (ie, using a radio booster/repeater to convince the car that they key is inside it rather than in the nearby house).
    But increasingly cars can be hacked, and it seems extremely unlikely that cars will be less hackable than other smart devices, and for much the same reason: security costs both money and convenience, neither of which users are willing to sacrifice. As we see with airlines, given the choice between carefully segregating the easily compromised bits from the mission critical bits or saving a few dollars, manufacturers and customers will strongly prefer the latter. One problem here is that compromises are systematic rather than specific – if someone can hack one Tesla 3 chances are they can hack all of them.

  14. Ernestine and KT2,

    If there is no congestion there is no need for congestion pricing. The issues of minimal supply between nodes that carry little traffic can be thought of as a CSO – the need to link up the community. Indivisibilities mean that a road 1mm wide will not work.

    The arguments against pricing on distributional grounds are uniformly raised across all types of externalities. The standard response is to evoke the Second Theorem of Welfare Economics – achieve efficiency first then fiddle with distribution. The use of user charges might be regressive because the rich have a higher value of time but these charges also mean that poor people can make emergency or high-valued trips more easily. You could make discriminatory compensations – provide more public goods or better public transport in poorer areas if you wanted to get fancy.

    Its not really much of an issue n the sense that current user charges (rego, insurance etc) are fairly (not entirely) regressive anyway.

  15. KT2, I have no problem with your amendment. I prefer income distribution measures to take into account location (geography) and some life cycle categories (demography). Regarding the latter, aggregating across all ages of people considered to be in the labour force does not do justice to anything, except perhaps if the income distribution is rather narrow across any particular location (region, country), say $1000 to $2500 per week all income included. Usually and for some plausible reasons, most young people (18-28) earn less than middle-aged people (35-55) or thereabouts.

  16. Harry,

    1. Well, I did figure out that the congestion price is zero if there is no congestion. But how are the roads financed in those non-congested regions? And what measure is being used to empirically designate some areas being congested but not others.

    2. “The arguments against pricing on distributional grounds are uniformly raised across all types of externalities.”

    Not all externalities, only the negative externalities. (Positive externalities tend to be captured in profits but not always.)

    It may well be that pricing of negative externalities is often objected to on distributional grounds and, I would say rightly so, if there is a flat price for all. I have linked my question to opportunity cost. To be explicit, there is not one opportunity cost but many.

    3. I surely do know about the second fundamental welfare theorem.
    Regarding: “The standard response is to evoke the Second Theorem of Welfare Economics – achieve efficiency first then fiddle with distribution.”

    No. The fundamental second welfare theorem defines ‘efficiency’ in terms of individuals’ preferences, subject to aggregate resource constraints and technological possibilities. The idea of the theorem is to choose a price system (all relative prices) and a wealth distribution such that the efficient allocation is implemented.

    So, no fiddling with the distribution afterwards – it is too late.

    To devise a ‘mechanism’ to implement this idea in anything larger than a very small and isolated society, characterised by everybody knows the circumstances of everybody else as a proxy for preferences, is mighty difficult. I would say, impossible.

    4. “The use of user charges might be regressive because the rich have a higher value of time but these charges also mean that poor people can make emergency or high-valued trips more easily.”

    Well, the above contradicts your point about the second welfare theorem. Furthermore, why should ‘the rich’ have a higher value of time than others? I don’t agree on elementary humanitarian considerations that rich people’s sleep should be valued higher than that of anybody else.

  17. Ernestine, Most of your points are wrong or misunderstandings.

    4. Rich people have a higher value of time in the sense that they have a higher willingness to pay to avoid delays. They will pay the tolls and be “tolled on”. The poor may be “tolled off’. I am talking about how individuals value their own time not making social judgements.

    3. Your interpretation of the Second Theorem is non-standard. but all I am saying is that welfare economics generally says maximise the value of the pie and then worry about dividing it. Don’t differentiate prices to effect distribution.

    Of course the impracticalities of doing this – of making lump-sum transfers – are well known and widely discussed. The results here are then approximations that reflect distortionary taxes and transfers. But the intuition easy; Be productive on the basis of efficient prices before being concerned with splitting the pie

    2. See 2. Your error here is that you don’t seem to fully understand the implications of the Second Theorem. You don’t charge different people different prices as that would be Pareto inefficient. Otherwise people could trade their allocations to make welfare gains for some and losses to none.

    1. I did explain this. With low volumes of traffic you get no congestion on roads that must be of a minimal scale because of indivisibilities. Optimally you need to trade off congestion against capital costs but on low traffic roads it is necessary to build at some minimum scale – say 2 lanes. Hence these roads are built at minimum scale to meet the CSO (community service obligation) to keep remote areas connected. On such roads there will be no congestion so they will be provided free as a pure public good.

    Whew!

  18. +100 Ernestine … “Furthermore, why should ‘the rich’ have a higher value of time than others? I don’t agree on elementary humanitarian considerations that rich people’s sleep should be valued higher than that of anybody else.”

  19. Harry, Please provide clarify and detail so we may understand better your reply to Ernestine at
    MAY 31, 2019 AT 8:02 PM above.

    1. why are the roads say in Sydney not 20 lanes wide by now, therefore my drving / sleep be valued at the same as everybody else? Or as you say “On such roads there will be no congestion so they will be provided free as a pure public good.” Couldn’t we have public good by now in a city after 200+ years? Is there an exclusivity externality theorem you know of? Perhaps it is not politics / social judgememt / private property, just lack of planning and equality of distribution?

    “4. Rich people have a higher value of time …
    [Q1; time has no value – explain in cosmic or economic theorems please ]
    …” in the sense that they have a higher willingness to pay” [ Q2: explain “higher willingness” as opportunity cost vs production with a theorem ]
    …” to avoid delays”. [ Q3; we had footmen and now phones. Explain delays relative to a theorem juxtaposing a word you’ve not mentioned vs poor which you did mention ]
    ” They will pay the tolls and be “tolled on”. The poor may be “tolled off’.”” [ enlighten me as to who “they are” please? And “tolled on and off” ??? as you easily “evoke the Second Theorem of Welfare Economics” I assume you have a theorem to explain and clarify “tolled on and off” to Ernestine & I please. ] 
    “I am talking about how individuals value their own time not making social judgements.” [ Q philisophical; explain why you are not making social judgememts please? Just because you wrote the words? As in your words HC; “public transport in poorer areas if you wanted to get fancy” ]

    If you answer these questions Harry, Ernestine and I are about to get the best ever economics lesson. Ever.

    I submit to you wielding the big “Whew!” [ please use only one exclamation mark in 10,000 words ]

    As I am ignorant of your reply to Ernestine, and in the spirit of egalitarian debating Harry, to answer Q philosophy above, put your phrase “poorer areas if you wanted to get fancy” into a search engine.

    I hope you answer my questions of your reply to Ernestine. When you do it will help you clarify your reply to Ernestine, and enlighten us all. Whew… whew almost spells when backwards!

  20. Harry,

    I don’t agree.

    1. May I suggest that a user pays approach in ‘congested’ urban areas and a pure public goods approach in regional and outback areas requires a theoretical approach other than what you offer, if you wish to avoid conflict within a society on economic grounds.

    2. Rest assured I do understand very well that, according to the second fundamental welfare theorem there is one price for every state contingent commodity (which of course would include congested and non-congested areas, each one of them, if you like, being refined by time interval of day, etc, etc.). The difference between your statements and mine is that I know why and under which conditions a Pareto efficient allocation can be decentralised via a price system. So, one first defines a Pareto efficient allocation (preferences, consumption and production possibilities and total resources) and then finds (conditions on the system) a price system such that these prices implement the Pareto efficient allocation.

    (You seem to mix up the first with the second welfare theorems. Note even the first welfare theorem has a strong condition on the wealth distribution, which is clearly violated by homeless people!)

    3. Second fundamental welfare theorem. My source is Debreu, Theory of Value, 1959, chapter 6, although it is not the only source.

    What is your reference for what you call ‘standard’ ?
    You write: “But the intuition easy; Be productive on the basis of efficient prices before being concerned with splitting the pie.”

    4. Are you practising an interpretation of revealed preferences? What if the relative prices are all wrong?

    What is wrong with quantity rationing of congested public roads?

  21. “The standard response is to evoke the Second Theorem of Welfare Economics – achieve efficiency first then fiddle with distribution.” That’s backwards. The second theorem says that any Pareto optimal outcome can be derived as a competitive equilbrium given the correct distribution of property rights. That is, distribution first, efficiency second.

    The prescription for going the other way comes from Kaldor and is logically incoherent – Scitovsky reversal problem and so on. That doesn’t stop One (or 1.5) Lesson economists from adopting it.

  22. The “standard interpretation” I agree is ambiguous. It’s the interpretation given in books that teach useable public economics – the book by Laffont Chapter 1 for example.

    The general idea is to get prices right, internalising externalities where necessary and then using the tax transfer mechanism to achieve equity goals.

    1. The problems of doing this have been subject to numerous complaints but I think the approach is better than subsidising road use for the poor.

    The standard intuition for this is discussed in John’s new book. The poor may not want to drive cars so you can never leave them worse off by giving them income equal to the value of the road use subsidy they would otherwise get.

    2. Quantity rationing of roads has been attempted -odd and even number plates travelling on alternative days for example – and it does not work well. The main problem is that latent demands for travel are released.

  23. Tesla have done some impressive stuff with their autopilot mode, and I admire them for trying to do it all with cameras and a single radar.

    But they’ve never quite been able to crack basic street light and sign recognition. Watch this one stopped at the lights in broad daylight not knowing what’s going on, and then deciding the next red light is green, then totally missing the set of lights after that, then only recognising the lights after that a second or two before it drives through a pedestrian crossing.

    As I said a few months ago, autonomous vehicles are currently significantly more dangerous than L-plate drivers.

    John, imho, it’s not regulation that’s standing in the way of their progress. The tech has leaps and bounds to go before regulation becomes an issue.

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