Economic Effects of the Sharing Economy

¶ … 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 deadweight loss because a higher percentage of production is sold, even if for a lower amount of money, and it is still being sold at a profit. 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 opportunity for existing players, so they have a tendency to seek greater protections for their profit streams (Surowiecki, 2013).

Uber

Uber runs on a similar principle. There are a couple of different types of Uber. One is for regular drivers and cars, who are not professional drivers. This is the lowest dollar price Uber, and the quality is variable. It works more or less how AirBnB works. Most cars are idle most of the time, something that represents a fairly destructive overproduction. If automobiles were utilized efficiently, where would be tens of millions fewer automobiles in America, and they would be running all the time. People pay enormous sums of money -- not to mention the environmental cost -- to have unfettered access to a vehicle. This is a horribly inefficient from an economic point-of-view, as those materials could be used for other things instead of sitting idle.

Other forms of Uber utilize professional drivers and vehicles, many of which are idle at different points in the day. They are idle largely because taxis are run as cartels in most places, protected by strict regulation that limits the supply. Uber allows drivers to earn taxi revenues in their off hours, resulting in greater economic efficiency, and avoiding some of the deadweight loss associated with idle capacity (i.e. parked vehicles). Taxi companies make a wide range of arguments why they should have such a cartel -- higher standardized quality for example (Frizell, 2014). The problem with the market is that not everybody wants the same high (and expensive) standardized quality. Just like with AirBnB, the sharing economy with respect to cars provides a much greater range of choices for the consumer.

Profits