Economic Report President

Box 5-7.—The Partnership for a New Generation of VehiclesThe Federal Government can play a particularly vital role inpromoting R&D in situations where the private sector’s incentiveto pursue innovations with environmental payoffs is distorted. Forexample, low gasoline prices have made consumers less concernedabout fuel efficiency, dampening the automobile industry’s interestin developing more-fuel-efficient vehicles. Yet vehicle emissionsare a major source of greenhouse gas emissions and otherpollutants, and therefore such efforts would produce clear benefitsto society.In response, the Partnership for a New Generation of Vehicleswas established in 1993 between the Federal Government and themajor domestic automakers, with the aim of dramatically increasingthe fuel efficiency of vehicles while maintaining performanceand price. A goal of the program is to develop, by about 2004, aproduction prototype of a midsized sedan that would achieve 80miles per gallon. The R&D needed to reach that goal ranges frombasic research into lightweight materials and alternative powersources to applied engineering of new manufacturing processes. Toentice firms to join the research endeavor, the government cofundsboth basic and more applied research and provides access tothe extensive Federal laboratory system and its experts. To date,several new technologies have been developed that are bringingthis goal closer to reality.Patterns and Incentives in Technological DiffusionThe diffusion of a new technology often follows a well-establishedpattern. Initially, the new technology is adopted by only a few. Overtime the pace of adoption increases, slowly at first and then morerapidly. The pace of adoption finally reaches a peak and then begins tofall as the market approaches saturation. The trendline of cumulativeadoption thus follows an S-shaped curve. The spread of informationamong potential adopters seems to explain this pattern. A few pioneersare the first to become aware of the new technology and make the decisionto adopt. Word of the new technology then spreads to those in contactwith the pioneers, and each new user informs several others, sothat adoptions begin to pick up momentum. Finally, after the bulk ofthe population of potential adopters has learned about the newtechnology, the rate of new adoption slows.This pattern of diffusion provides important insights into the rate ofadoption, but it does not answer the policy question of whether thatrate is efficient. Failure to adopt technology may be appropriate—thecosts of adoption may simply exceed the benefits. But market failuresmay also impede adoption, even when the benefits outweigh the costs.202