How Tesla is Upending Conventional Economic Theory

Recently, it came to light that Tesla would begin building destination Electric Car Chargers that support not only its cars but any electric vehicle currently on the market. At first, this seems counterintuitive: why would Tesla invest in something anyone can use? According to traditional economics, there is a reason Ford doesn’t build free parking lots everywhere, there is a reason Samsung doesn’t provide free cases for any phone, and there is a reason most companies don’t invest in common goods. But with the announcement that Tesla is seemingly throwing that logic out the window, we need to revisit the underlying economic theory.

First, it is important to understand where this theory stems from. By supplying common goods that are rivalrous (only one person can consume it at a time) and nonexcludable (anyone can access it without paying), a company will perceive no tangible benefit; after all, its consumers will not enjoy any advantage relative to other companies. Competition is what drives industries, and building common goods is not competitive. Companies, therefore, do not invest in common goods, while leaving it to the government.

So then why is Tesla using its own funds to build destination chargers when, keep in mind, its competitors can use them as well? In order to answer that, we need to step back and look at the bigger picture.

As Tesla provides more chargers, electric cars as a product become more convenient for consumers. When consumers are deciding whether to buy a regular combustion engine or an electric motored car, one pitfall associated with electric cars is the lack of public charging infrastructure. If the government is not providing at a pace that is fast enough, private companies like Tesla have the opportunity to build the infrastructure and make all electric cars more appealing. Furthermore, the entire electric car market will begin to balloon in size as more consumers opt for an electric powertrain. This is when Tesla can compete with other companies in terms of features and product quality.

The electric car market is at a turning point. It is growing at a rate where competition between electric car producers is surpassed by the competition between electric and traditional car manufacturers. Tesla investing in a common good, therefore, increases the competitiveness of electric cars, and as this process occurs, all electric car manufacturers can reap the benefit by taking a bigger slice of a bigger pie. This circumstance is analogous to when solar panel manufacturers funded publicly available research to make solar panels more competitive against fossil fuels. In Tesla’s case, I wouldn’t be surprised if other producers follow its lead and pick up the slack left by the government. This level of sacrifice is what’s needed at a time like this in order to prosper in the long term.

Overall, as we delve into the economics of the real world, we begin to realize that there are limitations to the economics of a textbook. Outside the classroom walls, there is no ceterus paribus, no perfect model, no paragraph to bind the real world with. For that reason, we must use what we learn but look beyond the underlying idea to the nuances of the real world.



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s