Feature Article on the Sharing Economy

By Salman Dostmohammad
AIMS on Campus Fellow

The sharing economy is quickly becoming a bigger part of our society, democratizing our access to services. But its reception has been mixed, bringing a wealth of opportunities for the public, uncertainty for regulators and disruption for established businesses.

It makes sense why platforms like Uber and Airbnb are so popular. They provide similar services for cheaper. So catching an Uber ride is cheaper than an ordinary taxi, a place to stay on Airbnb is cheaper than checking into a hotel, and using the car rental services of Turo is cheaper than renting the same car through Hertz.

Sharing economy services have a low cost of entry and there isn’t much in the way of “red tape” or burdensome regulations – yet. That’s because governments around the world are grappling with what to do next and Nova Scotia is just one example of this.

We know that over the past year the Nova Scotian government has commissioned a study to learn of the impact from sharing economy type services like Airbnb. It’s important to note that the government has indicated an intention to study, rather than out-right regulate the sharing economy.

This is a good approach to take. Regulations have the ability to stifle innovation and harm economic productivity if they are done hastily or improperly. The sharing economy brings many benefits – some obvious and others less so. The two most successful firms within this space are Uber and Airbnb. Currently Uber does not operate within the province, much less the rest of Atlantic Canada, but Airbnb certainly does.

The government has its eyes set on doubling tourism revenue from 2 to 4 billion by 2024. The recent creation of Tourism Nova Scotia as a crown corporation is an indication of the government’s priority in attracting newcomers and ensuring that their stay is enjoyable. The sharing economy offers newcomers a greater opportunity to save money while accessing services they enjoy.

Projection estimates from a Price Waterhouse Cooper study state that the sharing economy has the potential to increase global revenues from $15 billion to $335 billion by 2025. That means there is also a great deal of untapped potential here in the way of economic benefits.

Thus, it wouldn’t be a big surprise to assume that regulation is following close behind. However, it must be done prudently by carefully balancing the tradeoff between innovative opportunities and regulatory fairness for market players.

The government can’t forget the public either. Sharing economy services like Airbnb garner a great deal of public support.

A recent national survey by the Canadian Information Centre for International Credentials (CICIC) on behalf of Airbnb found that 67 percent of Canadians support home sharing with travelers and 65 percent want sensible home sharing regulations that are straight forward and easy to follow. Moreover, 77 percent believe that Airbnb has a good or neutral impact on their community.

A study from the Ontario Chamber of Commerce found that four in ten Ontarians between the ages of 18 and 34 said they were consumers in the sharing economy. Some post their rooms in order to make ends meet or to pay off their mortgage.

Governments must take public demand into account when enforcing existing regulations – especially in the short-term rental market as sharing economy services are consumer-driven destructive technologies. Firms like Airbnb currently operate in a grey zone in regulations which creates uncertainties for compliance purposes.

Addressing Regulatory Uncertainty

Governments are attempting to address the regulatory uncertainty from Airbnb by providing the public with knowledge and information about existing regulations.

Prince Edward Island (PEI) already has in place strict licensing standards for accommodations. The tourism department’s compliance officers have taken a conciliatory approach by contacting homeowners who post their rooms as “unlicensed hosts” and then guide them on the legal process. This strategy is superior to simply fining homeowners so they comply.

In Ontario, the government recently partnered with Airbnb as part of a pilot project, the first of its kind in Canada, so that homeowners and consumers understand their legal rights and responsibilities when offering or booking accommodations online. The partnership has Airbnb sending an email notification during tax season to remind homeowners of their tax obligations for reporting the income gained from hosting.

Both examples show a sensible approach by government to tackle the regulatory uncertainty from disruptive technologies.

Economic Benefits

Sharing economy services like Airbnb also offer significant economic benefits for the tourism industry. The Ontario government acknowledged that more than 375,000 people visited the province last year using the Airbnb service. This is good for the tourism industry and the broader economy overall.

Airbnb also enlisted on UrbanMetrics to provide a third party assessment of the economic impacts of Airbnb to the City of Toronto. The study found that:

  • Airbnb injects more than $417 million annually into the Toronto economy.
  • Airbnb guests tended to stay longer and travel in larger groups compared to traditional overnight visitors.
  • Airbnb guests spend approximately $100 more per day on average than traditional overnight hotel guests and those savings were spent on food and shopping in the local economy.

Based on all of this, the study found that if Airbnb were not available, the result would be a loss of $40 million in visitor spending.

While this study speaks to the economic benefits from Airbnb, there are additional environmental benefits. A study on carbon emissions from the tourism industry found that hotels were responsible for 21 percent of carbon emissions. Airbnb can reduce carbon impacts since it enables pre-existing housing to be used more efficiently and reduces the need for more commercial hotels.

Regulation

The potential for revenues and economic growth is a big reason for a cautious approach towards regulation.

The main reason that governments seek to regulate market behavior in the first place is to protect the public from externalities, asymmetric information, and other market failures. It remains to be seen whether the rise of services such as Airbnb, Uber, and others justify a regulatory response.

Quebec would contend they do, which is why they recently became the first jurisdiction to regulate home accommodation services. The new regulation charges travelers lodging taxes of up to 3.5 percent and violators face fines between $500 and $50,000.

It is entirely possible that there are genuine concerns at play here which may necessitate regulation, such as landlords who purchase multiple properties with the intent to rent or lease them rather than live in them. With a sizeable number of these landowners in the market, the rental prices of homes may increase, especially in cities that have an affordable housing problem.

That’s why the government’s study needs to contain a thorough analysis of all factors involved, and learn from what the study reveals. This may be why the government has decided to tap into the expertise of one of the province’s top economists in order to study what to do next.

For now, whatever the case may be – based on their popularity alone, sharing economy services appear as if they will be here to stay.

Governments need to think long and hard before they regulate, as the effects are far reaching and ultimately can be the difference between an economy that thrives and one that flounders.