The Rise of the Sharing Economy

What does it mean for North American cities?

by Andrew Klain and Avery Maloney

The sharing economy is on the rise: in 2014, the global sharing economy was worth $14 billion USD, and it is estimated to grow in value by $335 billion USD by 2025. The growing presence of the sharing economy in traditional markets, markets conventionally monopolized by large corporations, has created both business opportunities for entrepreneurs and regulatory challenges for government. The sharing economy, commonly associated with companies such as AirBnB and Uber, is a blanket term for the development of peer-to-peer (P2P) marketplaces. These markets, although new in design, find their origins in smaller scale examples ranging from local farmers markets to community yard sales, where individuals develop new business approaches when commercial businesses fail to meet demand. While our experience with these P2P markets is not new, the rapid expansion of these marketplaces, bolstered by the advent of social media and smartphones, has made participation in these markets more accessible.

The sharing economy’s unprecedented growth has been facilitated by the relationship between social capital, smartphones and social media. Social capital is a set of resources, such as recorded reputations and ratings available to individuals and communities, and is established through the repeated use of social networks. These social networks are usually comprised of social media platforms, online reviews and in-app reviews. Smartphones and social media have established these social networks locally and globally, and facilitate access to information about goods and services. This has resulted in greater individual awareness of competing companies in the economy and has improved available options for individuals when choosing service providers.

Increased usage of the sharing economy has created economic, political and social issues for people, governments and businesses. The most frequent problem associated with the rapid growth of the sharing economy is the skirting of existing governmental regulation by new businesses that have emerged from the sharing economy, which has resulted in unforeseen disruptions, particularly in personal transportation and housing sectors. For example, Uber and Lyft drivers operate without taxi medallions, which, while facilitating easier access into the ridesharing market for drivers, has caused the price of taxi medallions to plummet dramatically. Housing markets in Canada are also being impacted by the growth of P2P services; with rent surging in densely populated cities where many apartments are being converted to full-time, for-profit rental spaces. Due to the popularity and adoption of Airbnb, Lyft and Uber, the hotel and taxi industries have been some of the most vocal opponents against these P2P transactions, demanding that governments impose taxes, by-laws and other regulations to level the playing field. This battle has played out in municipalities across North America as national and sub-national governments have been slow to act, leaving many cities to handle these issues independently.

In 2016, Toronto developed regulations for the ridesharing market and became the first Canadian city to mandate private licensing for Uber drivers. Along with individual licenses, Toronto also established several other guidelines for operating in the city, such as mandatory background checks on drivers, motor vehicle inspections, and vehicle requirements, such as snow tires. Drivers are also required to place an Uber sticker on their windshield to indicate they are part of the rideshare program. The Rideshare Bylaw is an important development in the relationship between municipalities and the sharing economy. Rather than waiting on the provincial and federal governments to enact legislation, the City of Toronto has set its own guidelines for operation in the ridesharing market.

The city of Los Angeles has also taken steps to regulate the sharing economy by establishing regulations to counter what law-makers are calling ‘rogue hotels.’ These are short-term rental properties listed on popular P2P rental websites, such as AirBnB. In Los Angeles, many individuals have begun purchasing apartment buildings for the sole purpose of developing large-scale Airbnb operations. There are major financial incentives to operating AirBnB units, due to existing rent-control regulations. Near Venice Beach, a 21-unit apartment building could provide its owner an additional $277,000 USD per year if operated as a rogue hotel instead of as conventional housing, even with a 67% occupancy rate.

Lawmakers argue that the incentive to create these highly profitable rogue hotels is beginning to affect the housing market by increasing rent prices. In Los Angeles the average median rent has increased by 12% since 2013. In 2015, Los Angeles unveiled a proposal to target the short-term rental market, which includes a cap to rent a property a maximum of 180 days annually, allows hosts to only rent out their primary residence, bans the rental of rent-controlled units, and forces those operating on rental platforms to register with the city. Unfortunately, none of these suggestions have been implemented yet, continuing the legal battle for control of Los Angeles short-term rental market.

The developments in Toronto and Los Angeles demonstrate that the sharing economy is impacting individual municipalities in very different ways. The development of the sharing economy at the local level is contextual, meaning that individual city characteristics, including population density, levels of tourism, and traffic congestion, among others, will affect the supply and demand of these services. As the number of users grow, cities around the world are likely to develop similar regulatory measures as those adopted in Toronto. Cities may be best placed to enact legislation to control some of the negative effects of the sharing economy, as they can best understand the unique challenges and interests present within their bounds. However, because cities often lack regulatory power in comparison to other levels of government, it is likely that any substantive legislation will require cooperation with national and sub-national governments.

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Andrew Klain is a Masters student in the Department of Political Science at the University of Calgary. He previously completed his Bachelor of Arts in Political Science and History at Mount Allison University. He is interested in Canadian politics, multi-level governance, environmental policy and natural resource policy. 

Avery Maloney is an undergraduate student at Mount Allison University. He is working to complete his Honours degree in Economics and attend a graduate program in Economics in the fall of 2018. His interests include classical economic theory, welfare economics and the impact of technology on modern markets.  

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