Externalities and innovation: let me count the Waze

In a world obsessed with innovation and start-ups, we tend to forget that that are both costs as well as benefits that may ensue from such developments. Perhaps the most palpable example is the potential threat of innovation to current employment patterns, particularly in the so-called developed world. It is not merely that buggy-whips are replaced by the motor car, but that technological advance may lead to a decline in the overall rate of employment as fewer and fewer employees are required and jobs that require lower skill levels disappear. A further consequence of successful innovation is the matter of negative externalities. The problem of externalities tends to be ignored, much to our collective peril, as we fail to appreciate the full impact of what appears to be a world-beating innovation which, on the face of it, only betters our lives.

First a word about “externalities”. As developed by the economists, the notion refers to either “a cost or benefit that affects a party who did not choose to incur that cost or benefit.” As further observed by Wikipedia,

“unregulated markets in goods or services with significant externalities generate prices that do not reflect the full social cost or benefit of their transactions: such markets are therefore inefficient.” 

The example often brought is air pollution, where the damage caused to people, crops and buildings was for a long time not taken into account in assessing the economic contribution of manufacturing. But negative externalities are not limited to smoke stacks and traditional economic activity.

A graphic example of externalities in the context of innovation was well described in an Associated Press piece that appeared earlier this week. Entitled “LA Traffic is Getting Worse and People Are Blaming the Shortcut App Waze”.  Written by John Rodgers, the article recounts how mass use by drivers of the Waze smartphone app for finding the most efficient route to one’s destination is apparently responsible for severe traffic congestion on various side streets in the Los Angeles area that lie along one’s particular Waze-directed car route. For those Kat readers who may not be familiar with Waze, it is an Israeli-developed GPS-based geographical navigation application program for smartphones with GPS support and display screens which provides turn-by-turn information and user-submitted travel times and route details, downloading location-dependent information over the mobile telephone network. Most notable is that “Waze differs from traditional GPS navigation software as it is a community-driven application which gathers some complementary map data and other traffic information from users.” In the words of the AP article, Waze has become “explosively popular” and it is said to be the leading technology of its type.

The problem is that while Waze may succeed in reducing one’s commute, too often the recommended route appears to be taking drivers along previously sleepy LA back roads, much to the anger of local residents, who now confront traffic jams abutting their front yard. The result is described as “a parade of exhaust-belching, driveway-blocking, bumper-to-bumper cars.” A game of cat and mouse has ensued. On the one hand, some local residents have tried to tilt the technology by reporting false accidents. In reply, a Waze spokesperson simply observed that the technology “can’t be outsmarted.” Given the persistence of neighbourhood traffic jams, it would seem that Waze still has the upper hand. What seems undeniable is that one driver’s personal Waze-directed victory is, in the aggregate, the cause of a collective loss of time for neighbourhood drivers suddenly facing traffic jams. In other words, the wild success of Waze has brought about a negative externality for these unfortunate Angelinos. Never was the characterization of negative externalities, by such giants as Milton Friedman and Friedrich Hayek, as “neighbourhood effects”, more spot-on.

What are we to make of this situation? One cannot seriously entertain the suggestion that Waze be shut down. After all, the technology is not breaking the law even as it has improved the lives of countless drivers as they shorten their daily commute to work. In this sense, Waze is not Aereo, which also brought low-priced contents to home viewers, but was ultimately found to be in violation of the copyright laws. Solutions to at least reduce the cost of the negative externalities associated with the use of Waze are being pondered, such as speed bumps, four-way stop signs, and even a reduction in the number of lanes (a so-called “road diet”), but these measures must be thoroughly studied. More generally, the saga of Waze and the side streets of LA points to the fact that our conversation about innovation tends to ignore the cost side of the equation. As such, it can be argued that, until these externalities are adequately accounted for, innovators may be overcompensated for their developments at the expense of the cost being borne more generally by the broader society.

More on Waze here and here.