The Sharing Economy, is it worth it?

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.Screenshot_1

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.download 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.

 

 

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Supply & Demand Assignment

Market: Hummus

Rising Hummus Prices? Blame a Drought Half a World Away (Feb. 2018)

The cost of hummus in Britain is rising. According to the article, the average price of supermarket hummus was 12% higher than it was a year ago.

This is in large part because of an ongoing drought in India, the largest exporter of chickpeas (the main ingredient in hummus). This caused a change in a supply determinant – the cost of factors of production – as the cost of producing chickpeas increased. This caused the supply of hummus to decrease. In other words, the supply curve shifted to the left, meaning that the equilibrium price increased and the equilibrium quantity decreased. In layman terms, the drought in India devastated chickpea crops, raising the price of chickpeas, which in turn made hummus more expensive to produce, so producers needed to sell hummus at a higher price and/or sell less hummus in order to get the same profit they were experiencing before the drought.

Another cause of the increase in price is a change in Consumers’ Taste, a demand determinant. As hummus has become more and more ubiquitous, more Britons desire to buy it on a regular basis. This means that the demand for hummus has increased, and the demand curve has shifted to the right. In addition to causing an increase in the equilibrium price of hummus, this has also caused the equilibrium quantity to increase.

Ultimately, the shift of the supply curve to the left, and of the demand curve to the right have resulted in a total increase in the equilibrium price, and total decrease in the equilibrium quantity.

SupplyDemand Assigment

Supply and Demand Assignment

Market: Durians

In Malaysia, the price of durians has fallen. On a month-by-month and year-by-year basis, the cost of purchasing a kilogram of the fruit has dropped significantly. In the past month alone, a popular variety of durian known as Mao Shan Wang has gone from $20-28/kg to $12-20/kg, nearly a 40% drop in price. Last year, the Mao Shan Wang variety of durian may have costed more than $40/kg, despite the major growing season of durians being June to September.

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There are two causes to this drastic change in price and shift in market equilibrium:

The first cause is weather. Malaysia has experienced abnormally hot weather in recent times, which is perfect for growing durians. This led to a bumper crop, or a more productive harvest. The weather that created an unexpectedly large supply of durians would be a supply-side determinant, namely Cost of Factors of Production. The good weather allowed more durians to be produced for no additional cost, shifting the supply curve to the right.

The second is a change in demand. The article notes that after Chinese New Year, the demand for durians usually drops. Although it was noted that demand was still comparatively high, this change in the demand-side determinant of Buyer’s Preferences shifted the demand curve to the left.

The overall change was a large decrease in equilibrium price with a smaller increase in quantity supplied.

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Source. 

Supply and Demand Assignment

Market: “Wagyu” Beef

Wagyu, or Japanese beef, is widely considered to be the most premium beef on the market, and can be found in high-end restaurants worldwide for its “melt-in-your-mouth” quality. Despite declining domestic demand in Japan, the price of Wagyu beef has boomed to record-high prices. Since 2010, the price of Wagyu beef per kilogramme has skyrocketed from 2,100¥ to almost 3,000¥, or from $25 to $35 CAD. Rising Japanese beef prices have been caused by both an increase in international demand and a steady decline in Wagyu supply.

Demand for Wagyu Beef has seen a significant increase due to both a change in consumer tastes and a rising number of buyers. More specifically, the variety of beef has become incredibly popular with renowned chefs and “foodies” in Europe and Hong Kong, who prize Wagyu Beef for its unique taste and quality. In addition, the number of Wagyu importers has skyrocketed over the past year, leading to a 40% increase in Japanese Wagyu beef exports. Buyers in the US, Hong Kong, Taiwan and Singapore currently make the up the bulk of new buyers. Both these determinants have contributed to a rightward shift in the demand curve.

Supply for the premium beef has seen a significant decrease due to rising costs of factors of production and number of sellers. Farmers raising Wagyu cattle in Japan are beginning to age and retire, and their successors often have no interest in continuing to run farms. In 2017, the number of beef farms in Japan declined almost 40%, while cattle numbers also dwindled, falling 14%. Raising Wagyu Beef is also incredibly expensive for the average farmer, costing almost four times as much to own and operate than a conventional cattle farm. Both these determinants have contributed to a leftward shift in the supply curve.

Overall, the rightward shift in the demand curve and leftward shift in the supply curve have caused the equilibrium price to increase. However, because the extent of the shifts are unknown, a shift in equilibrium quantity cannot be determined without further data.

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Supply and Demand Assignment

Article:Pig Prices

Market: Pork

Perspective;

China’s hog prices have plummeted to their lowest point in nearly four years in the second week of March 2018. They are the worlds number one producer of pork and to put things into perspective, over half of the world’s pigs now live in China. More than 50 million metric tons of pork was produced in 2012 and that’s twice the amount of the meat produced in all 27 E.U countries and five times the amount produced in the U.S. China loves pork so much that it even has government reserves for the meat.

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Analysis;

Due to the increase in supply while demand remaining unchanged, prices for pork have plummeted.

The supply determinant is both seller expectations and number of sellers.

Live pig prices are now hovering just above 11 yuan ($1.74 USD) per kilogram in major producing areas, which is very much below the average production cost. (Plunged more than 20% from early January 2018)

As depicted by the article;

“The reason is very clear. There are a lot of pigs on the market,” said Feng Yonghui, chief researcher at trade website Soozhu.com.

The sudden drop in prices is due to big producer expanding to grow market share. Monthly government data had shown a drop in the number of the pigs that are bred, suggesting supply has not yet caught up with the demand. The government even ended up releasing some pork from its reserves (albeit not a large amount), the market was receiving signals of insufficient supply which misled the market.

An abundant supply during the Lunar New Year festivities (China’s peak pork consumption) led slaughterhouses to take advantage of the increased supply to set prices which led to growing price pressures on the market.

This ultimately led to suppliers believing that the demand on the market was more than what it was set at, causing them to over expand and over produce. This caused the market price to drop as to sell more pigs.

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Supply and Demand Assignment

Article: https://www.radionz.co.nz/news/country/351806/vegetable-prices-grow-as-crops-rot
Market: agriculture, cauliflower
Analysis: The price of fresh produce, particularly cauliflower has doubled in New Zealand. Due to increased rainfall and humidity from a recent cyclone, many crops susceptible to excess water have begun to rot or have gone to seed, with some claiming that as much as 80% of their potential harvest has been ruined. Since the crops were the goods(not a resource), the supply determinant here is number of sellers as some of these farmers simply can’t provide the volume necessary to grocery stores(although, some sites will count environmental/climate changes a separate determinant). Another factor to consider is cost of factors of production, as some farmers may still be able to salvage a portion of their crop, but it also means that they invested resources towards producing the normal amount but have received a lowered output. As the demand for cauliflower hasn’t changed while the quantity has decreased, there is now a shortage of the good. This means that on the graph, the supply line, would decrease by shifting leftwards (equilibrium quantity decrease), and the price would increase to match the new equilibrium(equilibrium price increase).graph

 

 

Supply and Demand Assignment

Market: Tomatoes

Source: https://www.thenewsminute.com/article/tn-farmers-dump-tomato-harvests-lakes-after-prices-drop-77230

There was a drastic fall in the price of tomatoes in Tamil Nadu, accompanied by a large increase in quantity. Over a 3 month period, the price of tomatoes dropped from Rs 20 to Rs 2, and farmers such a large excess quantity that they proceeded to discard freshly harvested tomatoes into lakes.  This is due to an increase in the supply of tomatoes, while the demand for the crop remained the same. Tomatoes are a short season crop, and require much less water to grow in comparison to the other options available to Tamil farmers, such as the long term crops of sugarcanes and bananas. At the time, there was a limited amount of water dedicated to the irrigation and growth of agricultural crops.  As a short term crop, tomatoes require less water and therefore less cost to grow at the time, in comparison to the farmers’ alternative, long term crops. Tomatoes are sell for a similar price to bananas in the area, and still sell for a higher price than sugarcanes per kilogram. Therefore, due to the lower cost and similar price associated with tomatoes in comparison to alternatives, the farmers expected to gain more profit from tomatoes, causing the supply to increase. This supply determinant is prices/profits of other goods that is responsible for the rightward shift in supply. As the demand is not shifted, the new market equilibrium point has an increased quantity and a lower price.

Increase in Supply