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.

 

Uber, but for Regulation

In competitive market economies, prices and profit opportunities signal scarcity and valuable production, and together, they coordinate efficiently the plans of millions of individuals in a decentralized fashion. But ironically, free markets have given rise to the modern corporation, microcosms  of command and control. Famed economist Ronald Coase solved the apparent paradox of the modern corporation by highlighting the importance of transaction costs. If a product has many inputs, negotiating each individual transaction and coordinating them across multiple parties can be extremely costly. Firms emerge to economize on these and other transaction costs, with competitive pressure leading to an optimal mix of outsourcing and insourcing.

The nature of the firm is a useful starting point for thinking about the distinction between government and governance. Both the state and the firm partake in governance by setting and enforcing rules, monitoring compliance, and engaging in rational planning to solve coordination problems in light of transaction costs. Likewise, when a state or a firm fails to practice good governance in the long run it either reforms or it ceases to exist. Reform and ruin occurs most often when the broader institutional setting somehow changes and, in turn, the nature of transaction costs also change. When transaction costs are falling, for example, governance can unbundle, which is what happened in the 1990s when firms began widely outsourcing customer support services to foreign call centers following lower trade barriers and innovations in communication technology. In addition, it is no coincidence that many countries undertook, in tandem, so-called “neoliberal reforms” during the same period. From deregulation to a greater reliance on subcontracting, public governance may be slower and clumsier, but it too is shaped by transaction costs.

Consider the battle raging between Uber and the global taxi industry. Although the current taxi licensing schemes in North America cities are conducive to rent seeking, I believe they reflect genuine efforts at good governance. Licenses are simply a blunt and easily-abused tool that gives customers some expectation of a minimum standard for quality and safety, and regulated prices eliminate the need to haggle with drivers. Uber’s innovation was in developing a multisided platform (MSP) technology that reduces transaction costs for both sides of the market. This platform features a driver and customer rating system and a responsive pricing algorithm that combines with preauthorized payments to remove any need for haggling. And by controlling a bottleneck to market access, Uber acts as a de facto private licensing authority.

To see why MSPs make for agents of good governance consider the market itself. Contract law, property titling, and a system of arbitration represent platform technologies for reducing transaction costs to the benefit of both buyers and sellers. And much like Uber, markets are subject to network externalities. The more sellers in a market, for instance, the more likely that buyers will agree to participate and vice-versa. But as long as there is the possibility of exit, market “regulators” will be driven to maintain a balance between the interests of buyers and sellers that is roughly consistent with minimizing social cost, even if their network effects tend them toward natural monopoly. Therefore, it should be no surprise that some of the earliest modern MSP technologies include marketplaces like eBay and Amazon, neither of which is primarily a retailer. Instead, they represent platforms that help connect independent buyers and sellers from around the world. Technologies like PayPal and services for dispute resolution are all ways to reduce transaction costs and to engage in genuine governance.

Similar to how Uber is disrupting traditional taxi governance, ecommerce is displacing conventional commercial governance. One could even imagine all rental units to eventually list on something akin to AirBnB, effectively rendering local Residential Tenancy Acts as obsolete and archaic as taxi industry regulations. Existing rental markets, for example, often dramatically favour tenant rights over landlord rights or vice-versa, depending on who had the greatest historical influence on the local council. But as Coase famously argued, the dual-sided nature of externalities makes the assignment of rights ambiguous in the abstract. While noise pollution has a social cost, for instance, forcing tenants to quiet themselves imposes a cost as well. If the loud tenant is having an amazing party, he may be more than willing to fully compensate the landlord or the sleepless neighbors. But more often than not, anger and ego are the ultimate barriers to a transaction and such a bargain rarely unfolds. Thus, good and effective laws are ones that approximate the assignment of rights that will minimize social cost on average; however, this attempt often fails because of special interest groups who capture the legislative process.

MSPs are adept at assigning these rights efficiently. Credit card networks, for example, make sellers bear the full cost of processing payments, while customers are often cross-subsidized through rewards and promotions. The only way to supplant an incumbent platform is to adjust the governance structure in such a way that social costs are better compensated by maximizing the bargaining surplus. In other words, MSP technologies are not just a bit better at governance. They potentially meet the economic definition of an ideal “public interest” regulator. Whether this technological revolution translates from local to national governments is not a question of if but when.

Much like the liberalizations of the 1990s, changes to the very nature of transactions have brought all forms of public administration and regulation to the precipice of a new way of reform. Critics will dub it an era of massive deregulation, yet that will be wrong. Less government does not imply less governance. Indeed, there will be exactly as much governance as you can bargain for.

Samuel Hammond is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Carleton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Uber, Economic Regulation, and the Open Market

In municipalities throughout Nova Scotia, as is the case across much of the Western world, local councilors are responsible for regulating the taxicab industry. This process primarily entails controlling prices and restricting licenses, as well as implementing safety regulations. Technological innovation, however, is changing the taxicab industry and governments have failed to heed the improvements brought by it.

Upon moving to Halifax in 2010, I noticed that taxicabs didn’t offer debiting services; in 2014, nearly every taxicab in the city provides this service. Halifax may be unlike other “big cities” in Canada, yet, technology available in Toronto, Montreal, and Vancouver is available here. To attract and retain consumers, i.e. riders, taxicab drivers must offer good services in return for the price they charge. In The Road to Serfdom, for instance, Friedrich Hayek argued, “Our freedom of choice in a competitive society rests on the fact that if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist, we are at his absolute mercy.”

The law of supply and demand suggests that the price for any given product will be variable until quantity demanded by consumers matches quantity supplied by producers, at which point there is equilibrium and all markets “clear.” This law does not apply strictly to the taxicab industry, where government controls the price of taxicab services and regulates the entry, and, therefore, “supply,” of drivers: restricting the supply of drivers creates excess demand for them, and this excess demand places upward pressure on the price of their services. Consumers, many of whom rely on taxicabs as their primary mode of transportation, absorb the rising costs of ineffective taxicab regulation.

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Taxicab drivers in Nova Scotia operate in a “non-market economy,” wherein government intervenes in the process of allocating goods and resources and determining their prices. This intervention creates a deadweight loss: “A buyer would be willing to buy the good at a price that the seller would be willing to accept, but such a transaction does not occur because it is forbidden by the quota.” Economic regulation of this type results in a net loss for consumers: “In every case in which the supply of a good is legally restricted, there is a wedge between the demand price of the quantity transacted and the supply price of the quantity transacted. This wedge has a special name: quota rent. It is the earnings that accrue to the [taxicab licensee] from ownership of a valuable commodity.”

In an open market, competition between drivers would place downward pressure on the price of their services and consumers would reap the benefits. Moreover, competition compels taxicab licensees to vie for consumers by offering better services, which results in a more robust and efficient market, whereas in the absence of market dynamism, the incentive to innovate is very low (or nonexistent).

Restrictive regulations in the taxicab industry, combined with the advent of technology, have resulted in emerging markets that fall outside the purview of economic regulation. Uber is a prime example.

Arriving in Halifax this past summer, the Chronicle Herald welcomed Uber with the headline, “Controversial Uber car service starts up in Halifax.” Uber provides a car-for-hire service similar to taxicab companies, however, its operations are unregulated due to “laws [that] weren’t written to account for technology that exists today.” One of the primary reasons that governments pursue economic regulation is to compensate for “information asymmetry,” but Uber provides a solution to this problem: it uses a rating system that gives consumers pertinent information about their driver. In other words, Uber is a product of competition and the company’s innovative model benefits drivers and riders. Perhaps it is time for governments across Nova Scotia to consider whether deregulating the taxicab industry and using a model similar to Uber’s would benefit consumers.

Rinzin Ngodup is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Dalhousie University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies