Have you ever taken an Uber, stayed at an Airbnb or taken out a peer to peer loan? If the answer is yes to any of these questions, then congratulations! You have participated in the sharing economy. So first off what is the sharing economy and why should you care? Well, that is a difficult question to answer since the sharing economy is a spectrum rather than a black and white term. For example, in China companies like Amazon and Netflix would be considered part of the sharing economy. There is also the collaborative economy, the on-demand economy, the gig economy that are interrelated with and can be confused for the sharing economy. For the purposes of this blog, we’ll consider the sharing economy to be a peer-to-peer (P2P) based activity of acquiring, providing or sharing access to goods and services that are facilitated by a community based on-line platform as defined by investopedia.com. This is a fancy way of saying that people share goods they already own with each other, usually for money. In recent years the sharing economy has blown up with companies like Uber, Lyft, and Airbnb having a combined market evaluation of 106.5 billion dollars, which is more than the GDP of Morroco. Wall Street is also bullish on the sharing economy, with 30 billion dollars being raised in 2016 alone.
While the term “sharing economy” was first used circa 2007 the concept has been around for much longer. For most of human history, there was no such thing as private property and everything in these primitive economies was shared. Research suggests that humans invented the idea of private property around 11 thousand years ago. This is also around the time agriculture was invented, suggesting the two developed together. Considering humanity has existed for around twenty thousand years it means that for almost half of human history our economy has only operated as a sharing economy. There are still hunter-gatherer tribes around today that operate with primarily a sharing economy. So while the idea of “sharing” may seem pretty novel now, it is actually pretty consistent with the way humans lived for most of history
Putting aside ancient hunter-gatherer tribes, what makes the sharing economy of today so profitable for all these big companies and investors? To answer that question we’re going to have to look at some economic concepts. The sharing economy is based on the idea that people own a lot of unused assets that are currently not making them any money. The owners of these assets are missing out on the opportunity costs of putting them into action. For example, research has shown that the average car stays idle 95% of the time. The opportunity costs of paying to maintain and keep an idle car are obviously very high. If you start using your car for Uber, you are now taking advantage of opportunity costs and are able to actually make money from your car, a previously unused asset. By allocating these underutilized resources towards more efficient uses they are making the economy more efficient as a whole.
This also relates to the idea of the production probabilities frontier, where right now people aren’t producing to their maximum potential. There are producing inside their PPF curve where they should be trying to produce on it. If this curve represented a person who has a car but is currently not using it too much they would be at point A. With a sharing economy enterprise like Uber, they would instead be producing at point B. This would allow the person to make more money and be producing at the optimum efficiency. This will make the whole economy more productive as a result.
So who are the actual winners and losers of the sharing economy? Well, let’s first start off by looking at the winners. Obviously, the economic benefits of the sharing economy are pretty indisputable. The producers, Uber drivers, people who rent out their houses on services like Airbnb, etc immediately benefit since they are making money from a previously unused asset. However, the biggest winner of the sharing economy phenomenon may end up being the consumers. The rise of companies like Uber and Airbnb have drastically reduced the cost for consumers, especially since Uber operates at a heavy loss to gain market share. Millions of new transactions that would not have taken place before are taking place now because of the sharing economy.
Another benefit of the sharing economy that isn’t talked about too much is the benefit to the environment. Since the rise of Uber and Lyft, people are less likely to go out and buy a car of their own to drive. This causes fewer cars to be on the road and therefore fewer fumes polluting our air. Shared services have helped to offset greenhouse gas emissions by up to 3% according to one study. The rise of Airbnb also reduces the demand for new residential sites and hotels. This means less nature will need to be destroyed in order to put up a new hotel or resort.
There are also interesting social benefits the sharing economy has the potential to bring to us. A lot of these sharing peer to peer platforms force strangers to meet face to face and actually interact with each other. This will encourage people to create more social ties with one another, and help combat the loneliness epidemic many western countries are currently facing. The sharing economy also facilitates the mixing of people with different socio-economic backgrounds. This is because on average those who rent out expensive assets like cars and houses will belong to a higher class than those looking to rent them. This social mixing will help reduce classism and promote cohesion among the members of our society.
Of course, wherever there is an upside there is always a downside and the sharing economy is no exception. The obvious losers of the sharing economy are the legacy firms in the markets Uber and Airbnb are currently disrupting. In many places where Airbnb has grown significantly hotel earnings have dropped accordingly. The rise of Uber and Lyft has also had an extremely detrimental effect on the taxi industry, as shown by the protests that we experienced in this city just a few years ago. The job losses caused by the disruption to these industries has been immense, and will probably get worse in the future.
There is also the concept of negative externalities to consider in regards to the sharing economy. For those who don’t know a negative externality is a cost that is suffered by a third party as a result of an economic transaction. The sharing economy is rife with examples of negative externalities. For example, if someone rents an Airbnb and then throws a party which keeps the neighbors up all night, that would be a negative externality. This has caused many neighborhoods in cities around the world to try and stop the growth of home sharing. As well with the increase in drivers working for companies like Uber and Lyft, roads in major cities are becoming even more congested. These negative externalities can be dangerous because no party in the economic transaction has any incentive to do anything about them.
Another problem is the wealth gained by the growth of the sharing economy is unlikely to be distributed evenly. Sharing economy websites tend to form natural monopolies making it easy for these companies to charge high margins. The other group of people who end up profiting the most from the sharing economy are the owners of valuable assets. These people are usually pretty wealthy to begin with so the extra income brought on by the sharing economy would increase the income inequality gap. As well this highly educated wealthier group of people is taking jobs like driving that traditional belonged to uneducated blue collar workers. This has the potential to increase our economic inequality even further. There has also been evidence that racial discrimination is present in the sharing economy. Airbnb has come under fire because it turns out African Americans earn less from rent than their Caucasian counterparts. On average the male African-American Airbnb earned 12% less rent than other hosts for the same type of house in the same type of location. Uber and Lyft also received backlash when it was discovered that African-American passengers received longer wait times and more frequent cancellations.
Now that we know the advantages and disadvantages of the sharing economy is it time for it to be more heavily regulated by the government? So far governments around the world have answered yes to that question and the sharing economy giants have been involved in many regulatory battles. Uber was recently kicked out of London and threatened to leave Quebec because of fights with the respective local governments. Uber’s many scandals and controversies have also not helped the company as they try to negotiate with regulators. Vancouver and Toronto have also proposed legislation to regulate short-term rental companies like Airbnb in their respective marketplaces. In many of these cases, governments have been caving to pressure from stakeholders in the industries Uber and Airbnb are disrupting.
In conclusion, I think it is too soon to tell what economic, social and environmental effects the sharing economy will have on our society. While the direct economic benefits are obvious there are problems with the distribution of those economic gains. The social and environmental benefits and negatives are also complex, and hard to measure accurately. However, I believe the sharing economy has a lot of potentials and I think it would be wrong to squash that. I am a firm believer in innovation over regulation and I think the government should give these companies a chance to prove their worth before they regulate them into oblivion. The government should try to help those affected by the negative externalities of the sharing economy, but not destroy the whole thing in the process. While there are many disadvantages associated with the sharing economy, I think the potential advantages greatly outweigh them. The sharing economy has the ability to make the world a better place, economically, socially and environmentally. We should take a chance on these companies, and give them the opportunity to prove their benefit to society. In the words of Glenn Carter, “There will be growing pains along the way — and more horror stories, no doubt — but the sharing economy is here to stay.”