Don’t Regulate the Sharing Economy

Ridesharing giant Uber has come under heavy fire recently with a string of revelations about its safety record, collection of private data, and relationship with the media. If Uber did actually mislead its customers, it should certainly be held responsible. But Uber’s stature looms so large that its unique controversies also threaten to cast a shadow over the “sharing economy” as a whole.

The rapid rise of the sharing economy is changing the way people around the world commute, shop, vacation, and borrow. Services like Airbnb, Yelp, and yes, Uber are disrupting long-established industries, from taxis to hotels. In the process, the sharing economy is creating new opportunities for those looking for work, and offers consumers greater convenience, better prices, and higher quality.

You’d think that, despite the actions of a few individuals, policymakers would embrace this pro-consumer movement. Sadly, you’d be wrong.

The response to the sharing economy from many policymakers in the United States and abroad can be best described as “ban first, ask questions later.” Even in Las Vegas—a city where nearly anything goes—consumers are forbidden from taking advantage of the benefits that the sharing economy can bring in the form of Uber and Lyft. And now Portland, Los Angeles, and San Francisco are all suing Uber for refusing to play by their old regulatory playbooks.

Defenders of the status quo claim the old rules protect consumers. But it’s more likely the rules just protect established, politically connected interests. As we detail in a new study published by the Mercatus Center at George Mason University, consumers can benefit more from the sharing economy’s better service options than they can from one-size-fits-all “consumer protection” rules that end up doing very little to benefit consumers.

Being cautious about how we regulate doesn’t mean that bad actions go unpunished. When companies do bad things they ought to be held accountable for them. But civil and criminal laws are already on the books in all 50 states that give wronged persons the ability to seek recovery against those who are at fault.

By regulating entry and limiting competition in certain markets, consumers are often left with less choice, poorer quality service, and very little in increased protection. This shouldn’t come as a surprise. From Ralph Nader to Nobel Prize-winning economist George Stigler, many realized decades ago that regulators often end up serving the interests of the firms they oversee. This concept is known as “regulatory capture,” and it helps explain the DC Taxicab Commissioner’s assertion that it “does not fight with the people it regulates,” but instead acts as referee between competing interests groups. That’s not consumer protection; that’s competitor protection.

The advent of the sharing economy gives rise to true permissionless innovation by expanding the information available to consumers, and creating strong reputational incentives for firms to improve their level of service. 

The ban of Uber in Las Vegas reveals the stark reality: As Firefox founder Blake Ross explains, for years authorities have been trying to keep taxis from scamming tourists by taking them the wrong way from the Las Vegas airport to the Vegas Strip. Using the tools available to it, the Nevada Taxicab Authority tried everything from roadside checkpoints to giant signs to creating a system for passengers to submit reports (PDF) when they were taken by the wrong route from the airport. All to no avail. The Taxicab Authority is now planning to create its own software to monitor these trips, which at one time was to be funded by taxing rides in taxis.

In contrast, the sharing economy figured out in a matter of weeks a problem that regulators in Nevada could not solve over the course of several decades. Through its five-star rating system, Uber is able to determine within an instant whether or not a driver took the passenger the correct route.

In the name of protecting passengers, however, tourists in Las Vegas are unable to take advantage of this service. Instead they are left with the patchwork of solutions devised by the Taxicab Authority, which isn’t serving them well.

Regardless of how things turn out in Las Vegas, San Francisco, Portland, or any other city facing the questions raised by the rise of the sharing economy, technology will always outpace regulation. And, unfortunately, all too often the response by policymakers is to try to stop the world until they have an opportunity to catch up—or let one bad apple spoil the whole lot. Instead, as new technology or competition strips away the need for some regulations, we should be questioning the rules, not the innovation.

Bending the world to fit a regulator’s worldview is simply bad policy and does nothing to help consumers.