I’ve got to be honest. I’ve only ever taken three Uber rides in my whole life. One to work, one to school when I was running late, and one to the mall when it was too cold to walk to the station. Despite that, knowing that Uber is always there, only a click away, makes me feel secure. And yet, only a few years ago hailing a ride with the press of a button on my smartphone was not only impossible but inconceivable. The idea that people can be influenced to share their assets, such as their cars, homes, and more, was widely disputed, many believing that sharing just isn’t a part of our capitalistic nature.
Uber was founded in 2009 and grew at an exponential rate, reaching a value of $51 million faster than even Facebook. It employs over 300,000 freelance employees worldwide and operates in 342 cities in 60 countries. Similarly, Airbnb started as two friends renting out their apartment to cover their rent, and quickly transformed into a worldwide service that allows travelers and locals alike to rent vacant apartments and rooms at a lower cost than regular hotel and housing services. Airbnb now operates in 34,000 cities and 192 countries, renting out tens of thousands of rooms in cities such as New York or Paris per night alone.
This was just the beginning of what we now call the “Sharing Economy.” The sharing economy is defined as:
An economic model in which individuals are able to borrow or rent assets owned by someone else.
The success of the sharing economy lies in its capability of reallocating under-used resources for more efficient purposes.
The benefits of a so-called sharing economy are obvious – sharing. When we allow individuals to gain profit from property they rarely use – such as private vehicles that go unused for 95% of their lifespan, we increase the individual’s income. As we know, an increase in buyer’s income leads to an increase in demand for products – it feeds our economy. The sharing economy creates jobs – it gives everyone the opportunity to become a micro-entrepreneur or freelancer – they can make extra profit on the side, set their own hours and can work from home.
The reason Uber became so popular, so fast, is that it filled in a supply shortage of taxis that existed previous to Uber’s founding. Try ordering a taxi during rush hour in New York City, and you’ll understand. Uber, however, is always available, as an increase in market demand can always be matched with an increase in supply by getting more drivers out on the road. Uber uses surge pricing (changing the equilibrium price) during peak times to counteract a drop in supply or a sharp rise in demand.
The problem with taxi services is that they cannot accommodate their prices to match shifts in demand and supply as efficiently as Uber, as cities place a cap on the number of tax medallions and synthetically restrict the number of taxi services available. This causes deadweight loss – which is eliminated when Uber is brought into the picture, as it fills in the gap in supply and demand.
As well, when unused resources can be turned into services for rent, it removes the need for the individuals renting the product to buy it. The less new cars purchased, the fewer apartments and houses are bought that sit unused, the more our environment benefits.
Nonetheless, Uber has its disadvantages. As I’ve mentioned above, surge pricing is applied during peak times and emergencies, in order to match supply to demand. However, it is debated whether the tradeoff of fairness for efficiency is fair. While people need access to Uber during emergencies and rush hour, they care about fairness as much as efficiency. No one wants to be paying higher prices, and the higher prices may cause someone to be unable to order a car. This is the opposite of a Pareto improvement, as some customers may be better off, but many will be left worse off.
Another disadvantage of using an online platform to rent and share assets is the greater amount of information shared on the internet which may lead to a gender or racial bias between users or companies. Recently, Airbnb faced claims of racial discrimination from Latino and African-American renters. In order for the sharing economy to progress, we must tackle these prejudices in both users and algorithms and make sharing assets online a fair and equal experience.
As full of promise as the sharing economy is, its existence, by itself, disrupts existing companies that used to be the sole providers of services such as car rides and lodging. Taxi companies protest against Uber and similar ride-hailing companies (such as Lyft), blaming them for their significant decrease in demand for taxis and income of taxi drivers. Could services part of the sharing economy, alone, be blamed for a decrease in taxi use? You cannot deny the relative negative impact that Uber has on taxis and taxi drivers. The income of salaried taxi drivers has taken a 10% drop since Uber was introduced. As we know, over time, substitutes are found for services, which makes the demand more elastic. When non-regulated services can operate at lower costs, they can lower their prices which will increase the demand for them, which decreases the demand for taxis, as the two are substitutes for each other.
On the other hand, while taxi drivers have seen a slight decrease in their salaries, there has been a 50% rise in the number of self-employed drivers in a city. Uber does not destroy as many jobs as it creates, as is demonstrated by the sharp rise in self-employment.
While regular businesses are regulated by federal, state, or local authorities, companies such as Uber and Airbnb are usually unlicensed and are not paying the same operating costs – allowing them to price their services lower – part of what makes them so popular. The sharing economy has many advantages and disadvantages but it cannot be fully accepted without figuring out what role the government must play in it. Should companies that implement the sharing economy’s principle of “What’s mine is yours, but for a price” have to be regulated just as regular service providers are? The current mindset of companies is to create first, regulate later, but this mindset is flawed as laws and regulations cannot catch up with the sheer rate of creation of new technology. Many laws and regulations are outdated and exist to prevent new competition in the market. A compromise must be found, where sharing economy businesses are taxed and regulated by the government fairly, while still keeping their advantages to the society.
In 2011, Time magazine reported the “sharing economy” as a phenomenon that will influence the world, and they were right. Through the use of the internet, real-time information, and collaboration, the sharing economy has transformed the way business is performed. The vast benefits of the system utterly outway the detriments, as long as the government finds a fair way to regulate the system, and as long as current businesses can adapt. After all, progress is always more important than tradition, and our system must evolve to fit the new demands of the society.
Turn to the most finance-savvy person you know. Maybe it’s a relative who’s memorized The Total Money Makeover. Maybe it’s a colleague who waxes poetic about compound interest in investments. Maybe it’s a friend who gains an unnatural amount of pleasure when browsing personal finance blogs. Whoever that person may be, I invite you to ask them: what side hustle do you recommend?
Perhaps you’ll get “part-time job” (yawn), “babysitting” (double yawn), or “online surveys” (puh-leeze). But maybe, if they’ve stayed up-to-date in the personal finance world, you’ll get “Airbnb” (screams and falls off chair).
Either work, really. But my point is, anyone who knows anything about side hustling knows that you gotta take advantage of what you’ve got. For side-hustlers like us, the sharing economy has been a blessing – so easy! So convenient! So many additional sources of income!!!
It seems too good to be true – and critical thinkers (*adjusts monocle*) always get a little tingly when that phrase pops up. It’s time to take off the rose-coloured glasses (or monocle) and look at the sharing economy for what it really is.
It’s pretty impressive, actually. I like it.
The Sharing Economy: The Good, the Bad, and the Definition (not in that order)
So first things first – what’s this “sharing economy” thing? At first glance, it sounds a bit like a summer camp activity where the counselors put all the kids in circle, make them hold hands, and sing cheesy rhymes.
Is it just me? Yes? I should move on?
The sharing economy isn’t anything like that (thank goodness). It basically refers to a model/system where people can rent/borrow things from each other – hence my Airbnb intro. Airbnb and Uber are both really good examples of transactions that happen in a sharing economy.
Now, I know what you’re thinking. But Sophie! you may exclaim, pressing your palms against your cheeks, I thought we had a capitalistic economy?
If you’re feeling a wee bit distressed at this shift in your worldview, I don’t blame you. I had to do some Google sleuthing myself. But basically, the way it works is that capitalism is a system. It just tells people “hey, if you’ve got bread and someone else wants bread, you can sell it to them. Price? Don’t care. Want to make cheese instead? Be my guest.” Meanwhile, an economy is more like an economic system or a series of transactions in a certain category.
Okay, I went off on a bit of a tangent there, so recap: sharing economy. If Sam has a lawnmower, the sharing economy would allow him to rent it out to Susan, who doesn’t have a lawnmower. This way, Susan doesn’t have to buy her own lawnmower, and Sam gets some cash for a thing that was sitting in his shed.
Now let’s move on to the nitty-gritty stuff.
Brief disclaimer: for the rest of the post I’m going to be talking about people like they’re firms or businesses (which, in the sharing economy, they kind of are).
When talking sharing economy, there are a few different perspectives to look at. I’m going to go small and slowly move up, so I’ll start by talking about individual effects before moving on to government regulations, business and big-picture effects.
The benefits to the renter are obvious. If we assume that, like regular firms, the goal of the individual is to maximize their profit, then the sharing economy allows individuals to increase their productivity. Only, instead of increasing output like a traditional firm, the individual takes advantage of already-existing output production methods. The rising prominence of the sharing economy has been a wake-up call, like an annoying friend who’s slapped you and pointed to all your underutilized assets in frustration, screaming “Why are they just sitting there?!?!”
The sharing economy lets people fully maximize output from the resources they have available, even if the resources in question are usually capital (cars, anyone?). So while the ultimate result is the same (an increase in revenue), the sharing economy lets the individual do this in a way that barely changes fixed costs.
Take this guy, for instance. He made an extra $30,000 in revenue over 2 years, simply by realizing he’d been performing inside his PPC. Over half of this revenue was from Airbnb, generated by a guest room that was collecting dust. All of a sudden, the opportunity cost of that dust-collecting room was the money he could be earning by renting it out. He didn’t just move along his PPC – he redefined it. The entire curve shifted outwards as he became conscious of resources he didn’t know he had. He was just doing what he normally did and earning money for it:
Even before I was hosting on Airbnb, I still had to take the time to keep my house clean. These days, I still keep my house clean… In a way, it’s like I’m paying myself to keep my own house clean.
This isn’t an isolated incident, either. In San Francisco, Airbnb hosts rent out their homes for an average of 58 nights per year, generating about $9,300 in revenue.
Essentially, the sharing economy benefits the renter because it brings in additional revenue – an economic incentive.
The benefits to the consumer, on the other hand, are equally obvious. Let’s go back to Silicon Valley for a moment. The average hotel room in San Fran is close to $400/night (*wheeze*). Extrapolating from the data above, the average Airbnb accommodation is $160/night ($9,300/58).
I know. The consumer surplus is dizzying; $240/night ($400 – $160) is nothing to scoff at.
But wait! There’s more!! I haven’t even begun cracking down on the sweet stuff – and by sweet stuff, I mean the cons of the substitute good (same thing, right?). You see, hotel rooms aren’t just more expensive – they’re more wasteful, too. By choosing Airbnb over hotels, consumers dodge around 1 kg of waste per night in addition to enormous energy savings. After all, renters don’t expect the host to vacuum and change the sheets every night.
These incentives apply to everything in the sharing economy (be still, my heart). In renting a neighbor’s lawnmower, you save on both the cost of buying one yourself (economic incentive) and the environmental ramifications of lawnmower production (moral incentive).
So there are economic and moral incentives to the sharing economy. There can’t possibly be social incentives, can there? Can there??? Can there?!?!?!?!
You may want to sit down for this.
What’s one of the most common reasons people use Airbnb? Sure, saving money’s one, but meeting people is another. Turns out, if someone’s visiting a new place, they enjoy interacting with a local(wow). This is put very nicely by Brian Chesky, co-founder of Airbnb:
There is a whole generation of people that don’t want everything mass produced. They want things that are unique and personal.
Is there anything more unique than a treehouse in Orlando? More personal than a car tailored to your group size? Plus, it’s so hip to rent things now, haven’t you heard?
Of course, this doesn’t apply to every transaction. Renting out a parking space to someone isn’t as personalized as dog-sitting. But the fact is that some transactions are much more personalized than their traditional counterparts. Consumers are lured in by all three types of incentives (or sometimes two), and locked in with the experience of total utility (full consumer satisfaction).
Alas, perfection is not a thing that exists in this world. Individuals on both sides of the transaction don’t always benefit completely (or even at all).
Warning: Math Ahead. Proceed with Caution.
Say you’re an Uber driver in Detroit and want to know whether it’s actually profitable. According to this report published by Buzzfeed News, you’re likely to earn an average of $12.70/hour before expenses. Taking the average speed limit for Detroit (35.1 mph), we find that the driver makes around $0.36/mile. Considering account asset depreciation, price of gas, and insurance/repairs, this comes out to $8.77/hr after expenses – $0.48 less than minimum wage.
The basic numbers are:
Marginal revenue: $0.36/mile
Marginal costs: $0.17/mile
Average total cost: $5.95
I know that $12.70 minus $5.95 does not $8.77 make, but remember that there are adjustments since drivers aren’t driving at 35.1 mph the entire hour.
Uber driving especially is a good example of the diminishing returns effect, and a somewhat good example of the spreading effect. The sharing economy is rich in both – you’ll see why.
Assuming you own the car you’re driving, the more you drive the more miles you accumulate and the more worn-down your car gets. As a depreciating asset, the more you use, the less its worth – hence the high marginal costs listed above. The variable costs involved here include the rising prices of gas and miscellaneous repairs that could result from frequent driving (ie. headlights going out). Meanwhile, the more you drive, the more ratings and reviews you accumulate on the Uber app, increasing your revenue. However, the spreading effect isn’t present to the point where it offsets the diminishing returns effect, making the lucrativeness of Uber driving dependent on revenue.
But let’s take a look at the consumer side of things. Here, the main con is the government’s (lack of) presence in the sharing economy.
The Government and the Sharing Economy
Peer-to-peer transactions that occur within the sharing economy aren’t as regulated compared to business-to-individual transactions. Sharing economy transactions have a reputation for missing customer protection. After all, the businesses involved don’t pay as much for background checks and insurance since there are so many contracted individuals.
Speaking of taxes, did you know that Uber’s actually created something called a tax shell? It’s exactly what it sounds like: a form of protection against paying taxes. Apparently, tax shells are all the rage in Silicon Valley; Facebook and tons of other companies were in the bandwagon long before Uber. By setting up daughter companies in foreign countries with different tax laws, an enormous amount of accounting profit from international markets can evade taxation. It’s not technically illegal, and it’s not like the national government can do anything about it; you can’t just tell a company not to expand.
But when it comes to sharing economy transactions that don’t operate via businesses, like the oft-used neighborly lawnmower rentals, the government doesn’t really tax transactions. In an economy that has an estimated $26 billion in value, even a small amount of untaxed transactions could have a big impact. Also, those informal transactions aren’t often regulated. You could agree to rent a lawnmower from someone only to see it and realize it’s one of those hand-push ones that has rusty blades – still technically a lawnmower, but something that leaves you feeling like you’ve been scammed. If you’d bought a lawnmower from Home Depot, they wouldn’t have gotten away with such a crummy product.
Furthermore, it’s hard to pin down which industries these sharing economy businesses lie in, which complicates which regulations they need to comply with. Uber, for example, is a technology platform. The business itself isn’t part of the transportation industry, but its independent contractors are. As a result, since the Americans with Disabilities Act only applies to transportation companies, Uber considers itself exempt. The government hasn’t stepped in, and it looks like they aren’t going to anytime soon.
It seems that the problem lies in the fact that, yet again, the world has advanced faster than government policies (*sigh*).
Businesses and the Big Picture
Most businesses in the sharing economy offer economic incentives to consumers; they have lower prices than traditional services. Unlike a traditional pricing-out of competition, which is how an oligopoly stays an oligopoly, businesses in the sharing economy don’t need to make any improvements to productivity or efficiency to lower costs. I’m sure we’ve all heard of taxi companies’ decline in revenue (thanks, Uber). In relying on the general populace to provide the good/service, sharing economy businesses have lower fixed costs. This causes lower marginal and average total costs, leading to the substitution effect that makes people switch from taxis to Uber.
Actually, the taxi/Uber thing is pretty interesting. You see, Uber actually filled a shortage in the market – a purposefully created shortage that restricted the number of taxi medallions on the market for the sake of congestion. Society used to experience deadweight loss, as we lost the benefit of the cab rides that would’ve happened had the number been unrestricted. So the surge in Uber isn’t just because it’s cheaper than a taxi – it’s because supply is suddenly meeting demand. The sharing economy’s actually bringing supply and demand closer to an equilibrium point, which is pretty darn neat.
There’s one last economic advantage to the sharing economy: it’s local. In having revenue be funneled into individuals rather than businesses, money can be effectively re-circulated in the local economy. Instead of consumer payments going to the CEO of Hilton, it’ll be going to someone like a single mom renting out a room on Airbnb. That mom will experience a greater amount of purchasing power as her income grows (wow, a demand determinant!). That money’ll stay in the city she lives in and be redistributed to other citizens, growing the local economy.
The Ultimate Conclusion?
So, the rose-coloured glasses have come off, and they’re staying off. After all those words, all that research… so what? What’s the verdict?
Supplier gets an increased revenue (and increased purchasing power), benefiting the local economy
Consumer gets a nice consumer surplus along with economic, moral, and social incentives
Supplier isn’t guaranteed to make above minimum wage; high marginal costs
Consumer may not always get the best quality product due to lack of government regulation
Businesses suffer from lower-priced competition
Even though the pros outnumber the cons, I still think that the sharing economy is beneficial. It provides excellent opportunities for individuals to both make and save money, the importance of which cannot be understated. An Airbnb listing might be the extra revenue needed for the host to funnel money into savings, or help pay off their mortgage. It empowers individuals to become more financially independent, which is critical in today’s debt-ridden world. It might not be a good primary source of income but hey, side hustles, anyone? It also helps local economies and keeps circulation within the community, which I am all about. Also, the consumer surplus involved in some of these transactions is incredible, meaning that people can redirect those funds to things that matter to them, whether it’s a trip with friends or paying off student loans.
While there are disputes between new businesses in the sharing economy and their traditional counterparts, I think that some of those disputes are just a result of one of the factors of demand elasticity: time. As time passes, substitutes naturally arise. This is an economic fact, and in a situation where two groups are competing for the same market, basic economic principles will determine which gains the majority and where consumer niches will pop up.
The lack of government regulation is a definite problem, especially the less-than-adequate insurance. But this is normal: advancements happen, mistakes are made, and the government and its regulations wizen up.
(Now if only they could be a lil’ bit quicker about it)
Posts by and for the CIA4U course at William Lyon Mackenzie