Electric dreams come true. (Scan).

Toyota motors recently unveiled an unassuming mid-sized sedan. The 2004 Prius, a streamlined jellybean-like car, stacks up nicely against cars like the Ford Taurus, Honda Accord, or Chevrolet Malibu when it comes to features and amenities. From the standpoint of most passers-by, an oversized hatchback is its most daring feature.

Look beneath the hood, however, and things get more complex. Thanks to a hybrid electric drive system that uses batteries when the car is moving slowly, and a gasoline engine on the highways, it never needs to be plugged in, promises fuel mileage over 55 miles per gallon (similar conventional cars get about 30), and greatly reduced pollution. It also features a brand-new electronic steering system. The 2004 Prius will sell for only a few thousand dollars more than similar models that lack the same high-tech wizardry and guzzle a lot more gas.

While Toyota has marketed a Prius model since 1999, that one is best classified as an experiment: It loses money for Toyota and is a lot smaller than the top-selling midsize sedans (see TAE, September 2001, "The Car of the Future?"). The new Prius, which goes on sale this fall, could well turn a profit for the company. And, like every innovation that the Japanese auto industry creates, it's a private-sector effort: Even the insanely bureaucratic Japanese government stayed out of Toyota's hair when it came to developing the Prius.

The United States government, on the other hand, tried to persuade auto companies to build ...