Regulating the Sharing Economy: Uber and Airbnb

The New York City Council is struggling to develop a governance mechanism for new forms of business such as Airbnb and Uber. The goal is worthwhile. We regulate safety, minimum pay, and working conditions in hotels, restaurants and cabs, and it makes sense to protect workers and customers in these new businesses as well. But we need to avoid over-regulation that destroys private businesses and replaces incentives with prohibitions. Long ago, New York City set a cap on the number of yellow cabs and the cost of entry into that business got absurdly high. At its peak, a medallion cost a million dollars. The license was far more valuable than the vehicle or the business itself. There were too few cabs, especially outside of the central business district. Cabbies no longer owned cabs, but leased time in them from fleet owners who kept each cab in service 24 hours a day. Regulation failed, and jitneys, black cars, green cars, and finally Uber and Lyft displaced yellow cabs.

Just as over-regulation harmed yellow cabs, it also established a pattern of neglect for our mass transit system. The original subway lines were public-private partnerships run by private firms operating under a government franchise. But the sanctity of the nickel fare made inflation-driven fare increases politically infeasible. A drive for public ownership of the system by Mayor LaGuardia invoked clauses requiring the sale of the system, and eventually all the private subway companies were driven out of business.

The technology of the smart phone creates new businesses and issues of governance and management for communities that wish to benefit from these new opportunities. But while we want the benefits of smart-phone enabled service, we also need to ensure that unanticipated and indirect impacts are addressed. While New York is growing in population, bus and subway ridership is declining slightly, and the number of non-metered cabs has grown from 63,000 in 2015 to over 100,000 today. Congestion continues to grow, and some people blame this on Uber, Lyft, and similar app-based services.

The New York City Council’s proposal to regulate these vehicles is an aggressive form of command and control regulation: they plan to cap the number of vehicles. This is a public policy that failed miserably with yellow cabs. The number of cabs was so over-regulated that a wide variety of competitive car services entered the market, since in most part of the city street hailing a yellow cab was a joke. Limit Uber licenses and some other technique to get around the city will emerge―guaranteed. New Yorkers need to get places. And sometimes that means they go from Brooklyn to Queens in two neighborhoods that have no subway lines. Sometimes people can’t risk the potential for massive delay that our deteriorating subway system has become famous for. So, cap the number of Ubers and be prepared for whatever comes next. If you cap the number of drivers, then current drivers will add hours to their work days at the expense of safety. If you limit cars, then just as we saw with yellow cabs, drivers will lease their cars to other drivers and the number of cars on the road at any one time will increase. Twenty-first century regulation should learn from the regulatory failures of the twentieth century.

There are alternatives to command and control regulation and one can envision a number of policy proposals that might work. First, at long last, enact congestion pricing―for all vehicles. Use the money generated to make the subways decent. Second, set a livable minimum wage for drivers of all services. Third, end the system of owning and trading taxi medallions. The price of a taxi medallion has gone down dramatically; this is the moment for the city to buy them back and return to a sane system of regulating yellow cabs. Fourth, begin construction of new light rail, or dedicated bus systems such as the ones in Bogota, Colombia, and when possible build new subway lines in the underserved parts of Brooklyn, Queens, the Bronx and Staten Island. Finish the Second Avenue subway to bring mass transit to the Lower East Side. A fast, clean, cheap and reliable subway can compete against any kind of auto travel. Make mass transit better, cheaper and faster and charge motor vehicles for using crowded roadways. Today’s system literally stinks, and people are learning to avoid it if they can. Make it better and cheaper to go by mass transit and people will do it. Designed correctly, a minimum living wage for drivers will force self-regulation on car companies. To pay drivers the regulated wage, companies will need to ensure that the cars on the road are busy enough to make money. Uber will need to balance each additional car against the actual demand for rides. This will be difficult to implement, but it could work.

While transportation is complex, housing is probably worse. Real estate is an obsession in New York City. I’ve been to social occasions with no realtors or developers present when most conversation was about housing trends and prices. Many people find themselves living in homes that represent all of their equity and search for some way to monetize it. Hotels in New York are expensive and not plentiful in every neighborhood, and so there is an opening for an alternative. At its best, Airbnb is a perfect fit for that niche. But then we see the unscrupulous types who see Airbnb as a way to open up a hotel that is not subject to city health and safety regulations. They buy all or part of an apartment building, furnish it, and advertise it on home share sites like it is someone’s home. They remove housing from the market, making apartments scarcer and therefore less affordable for residents. The issue is, how do you allow the “good” type of sharing while preventing the “bad” kind? The caution on all of this is that in the era of the smart phone, developing a method of evading rules is relatively easy, so old-fashioned 20^th century style approaches are likely to fail.

In regulating the sharing economy, remember that sharing is an asset for the sustainable city. Uber’s main competition is not the subway, but private ownership of cars. Excellent ride sharing makes car ownership less necessary. House sharing makes more efficient use of a city’s built environment, since a higher percentage of available space is used. Millennials seem more interested in getting places and sharing experiences than owning stuff. This is a trend that should be encouraged. Moreover, the economic, technological and social forces generating the sharing economy will not be stopped by government regulation. They will be steered and shoved, but not stopped.

Governance of the sharing economy should prioritize issues of health, safety and economic fairness. The street-hail yellow cab has a role in our transit system, but app-based ride shares are a superior service. They allow you to vet your driver (and for them to vet their riders) and can provide service to underserved areas. We should expect the decline of yellow cabs to continue. This happened to horse and buggies too. The dwellings of Airbnb owners offering multiple units should be subject to government inspection and regulation, but they should still be allowed. If they are really hotels, they should be regulated as hotels.

As cities and states move to regulate these businesses, they need to experiment with innovative and creative mechanisms that maximize effective governance while minimizing unwanted negative impacts. These are new forms of business and the old forms of regulation will probably not work. The services provided by Airbnb, Uber and Lyft are popular for a reason: they meet marketplace demand. New York’s City Council should look for a more creative way to regulate Uber and Lyft. The new businesses are enabled by computer applications that appear on PCs and smartphones. Those same technologies might be used to help govern the services provided. The cost of regulation will need to be passed on to service providers and, ultimately, to customers. This will include rule setting, inspection, and enforcement. Hotels, cabs, and other businesses are regulated by local governments and these new services will also need to adhere to rules.