¶ … Sharing Economy Deadweight Loss

When it comes to the environment impact of humans on the planet, overconsumption is not necessarily the issue; it is overproduction. Overproduction creates a situation where there is more supply than there is demand. Thus, some supply in the marketplace goes unused. This is an inefficient use of resources, or a deadweight loss to society (Investopedia, 2015). There are a number of different reasons why deadweight loss arises. The sharing economy has emerged as a response to deadweight loss that derives from overproduction.

Overproduction occurs in many industries, largely because companies are competing for customers. Demand fluctuates, and companies will typically have more production capacity than they need, in order to be able to meet the peaks in demand and therefore not lose business. Overproduction is therefore inherent in any market economy. But overproduction creates deadweight loss. A market that has a high degree of flexibility will be able to manage overproduction to some extent. The market for clothing in the United States provides an example of how this works. Clothing is initially sold at big department stores or own brand stores at full price. Clothing that is unsold (excess production) is then sold off to discounts and off-price stores (i.e. Marshalls, TJ Maxx) where many of these clothes can find a market among people who are willing to sacrifice selection and newness for a lower price. Clothes that still remain unsold can find their way through other channels, sold at a price just below disposal cost, to vendors who may then sell these clothes in other countries. The system has evolved in a manner to manage overproduction, while extracting maximum profit. If it was possible to perfectly align production with demand, off-price retailers would not have inventory, but a certain amount of overproduction is built into the system (Chernikoff, 2010).

When the system adapts to manage overproduction, it is more economically efficient. There is less...

In other industries where the sharing economy has emerged, that emergence reflects an environment of overproduction, and a need/desire to utilize existing capacity more efficiently. Two such cases will be examined -- cars and homes.
AirBnB

AirBnB is a website where people can rent out real estate on a short-term basis. The vendors will often not be professional, registered vendors of such space, but rather people with spare apartments, unused houses, or spare bedrooms. AirBnB is a way for people to make money without the investment that goes into running an official guesthouse. This sharing economy arises for two reasons. One is that governments typically exert tight control over the market for accommodations, in particular through licensing. The supply of accommodations being managed gives way to an increased bargaining power for suppliers. There are only a few different accommodation types, they are often clustered in specific areas, and as such there is insufficient competition. This creates latent demand in the marketplace, for greater variety of accommodation options and for more competitive pricing. There are many people who have extra supply -- spare properties or rooms that are presently unused.

Thus, there is unused capacity in one area of real estate, and a shortage of capacity in other area. Naturally, the latter results in buyers being price takers, and at the same time there is unused capacity elsewhere this represents significant deadweight loss. Moreover, this economic inefficiency spurs wasteful production -- building new hotels when none should be needed. The sharing economy delivers greater economic efficiency by using existing surplus real estate to absorb the excess demand, and the provision of more flexible options only improves the economic efficiency of the accommodation market. Of course, greater economic efficiency reduces profit-taking…