Do Policies Against Sharing Economy Yield Positive Results?

Young persons, especially technology entrepreneurs, often run into trouble because they assume that the rules that apply to the real world do not apply to the Internet. As Ryan Calo, an assistant professor at the University of Washington Law School, told New York Times, “These folks grew up in a world where platforms are not responsible, and then when they go do stuff in the real world, they expect that to be the case.” However, such assumptions lead to trouble.

For instance, when a woman was raped by an Uber driver, the Indian government had to rethink their apprpoach towards the online taxi service aggregators.

More recently, Berlin banned tourists from renting apartments through San Francisco-based home-sharing portal Airbnb and other such plantforms. The city authorities believe that housing will become less affordable if people rent out entire apartments to tourists. When the same argument was made in the context of New York City, Airbnb claimed, “We all agree that illegal hotels are bad for New York, but that is not our community. Our community is made up of thousands of amazing people with kind hearts.”

Is it actually true that housing prices will rise if Airbnb allows local residents to rent out entire apartments to tourists? Not really. The market price system is only a way of allocating resources in the best-possible manner. Now, housing is a scarce resource and if tourists are willing to pay more for renting apartments more than local residents, this mean that their need is more urgent.

Berlin's authorities see housing as a limited resources. But, this is not true, so long as the government is willing to allow people to build as many houses as possible. If there are great profits to be made by renting out apartments to tourists, there will soon be greater investment in rental housing. When there is greater investment in rental housing, the supply of housing will rise. When the supply of housing rises, rents and housing prices will fall. However, if the government artificially restricts supply by forbidding apartments owners from renting out property to toruists, such investment will never happen.

Consider this analogy. When Uber resorted to dynamic pricing by allowing taxi drivers to charge more when demand for their services are higher, many people protested. Uber had to give in when the protests became intense. But, when they suspended dynamic pricing, it suddenly became difficult for people to rent taxis. Columnist Amit Varma points out that the next day when he switched on the app, there was no cab available. When the government tries to prevent a healthy market activity, this is what usually happens. With dynamic pricing, supply will meet demand because more taxi drivers will find it profitable to offer their services. Taxi charges will soon decline, making Uber within the reach of many low-income people.

This is true of housing, too. As Berlin banned Airbnb from listing such properties, there will soon be ways for such apartment owners to reach out to tourists. If people find other ways to find tenants more often---say, through agents---rents will rise even further. For rents to actually fall, there should be a free market. Online platforms make the process of renting out apartments to tourists more transparent.