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Regulating the “Sharing Economy”

| Jul 28, 2014 | Opinion

The “sharing economy” is booming. But the same web-facilitated transactions that allow individuals to contract with each other for various services, such as lodging (Airbnb) and transportation (Uber), also present a difficult challenge for government regulators. These new sharing companies can pose some of the same risks as do the incumbent firms they compete against, but traditional forms of regulation could also stifle these innovators and keep them from offering services that are good for consumers. The solution, we think, lies in an approach we call the “general permit.”

Approved StampEconomic services like lodging and ground transportation have traditionally been provided primarily by large, centralized companies (like big hotels and major taxicab companies). Or, if they were provided by small businesses, they would have been provided by someone who made such services their sole livelihood (such as individual bed and breakfast owners and individual taxi drivers).

Unlike these past business models, the new sharing economy allows people to provide services on the side. By using Airbnb, for example, homeowners can rent out their houses for a few weeks a year when they are on vacation.

The sharing economy holds much promise: extra income for a wide range of people; greater use of resources that might otherwise sit idle; and more affordable and accessible services.

But the sharing economy has run into a roadblock in the regulatory arena. State and local governments are cracking down on Airbnb rentals that, they assert, violate laws regulating lodging services. Local and state governments in places like Washington, D.C. and California are also trying to enforce taxi regulations against Uber and similar companies.

The Internet companies that are the backbone of the sharing economy object that the regulatory system that might have made sense in the pre-digital age – when only full-time operators provided lodging or transportation – make no sense today. They claim that the regulations and paperwork, if enforced against individuals seeking to provide services through Airbnb and Uber, will hamstring the growth of the sharing economy and all its potential.

In our opinion, it does seem odd to regulate an individual who is renting out their own home for a few weekends a year as if they were the Hilton. As the CEO and co-founder of Airbnb has pointed out:

If I’m going to vacation for a week, and I rent out my home, I shouldn’t therefore be viewed as a hotel, have a fire marshal come to my place, have to get a series of inspections, incorporate as an LLC or a corporation, have to go through a 90-day permitting system, and do all these things to rent my place for a week. Now, when I reach a certain threshold, maybe [that type of regulation] makes sense.

On the other hand, there are surely public interests at stake in ensuring minimal standards of safety and fairness in the sharing economy, as even companies like Airbnb will concede. Indeed, an Uber driver has already killed a pedestrian in San Francisco; tourists using transportation services might be concerned that they could be ripped off or the victims of crime or an out-of-control driver; and property renters and owners who make aggressive use of Airbnb to rent out their homes can impose significant impacts on their neighbors, such as traffic and noise.

So, we need some regulation in the sharing economy, but with a light touch. We don’t want to stifle innovation by pushing strict regulations on large numbers of actors doing small-scale activities. Still, we must recognize that the cumulative impacts of those activities might be significant.

This is an area where general permits might be tremendously helpful. General permits could allow for ensuring that minimal standards are met, provide essential information to local governments and the public about the scale and nature of the activities occurring in the sharing economy (something that is sorely lacking right now), and allow for the identification of problems – either in types of activities or particular actors – that warrant more intrusive regulation.

One example of the role that general permits could play is how San Francisco regulates short-term (less than 30 days) occupancy rentals – what Airbnb does. Under current law, such rentals require a conditional use permit approved by the city planning commission. To get such a permit, an applicant must fill out a seven-page application (potentially including architectural drawings), provide notice to all property owners and residents within a 300-foot radius of the property, and have a public hearing in front of the planning commission. The commission has to make specific findings that the permit, if granted, won’t cause negative impacts in the neighborhood, as well as specific findings for lodgings: namely, that they won’t impact transportation or housing in the city.

We think that this process seems excessive for the average homeowner seeking to rent their place out while they are on vacation. A general permit system might allow homeowners who will not rent out their property for more than a specific number of days in a year (say, 14 total, and no more than 10 consecutively) to provide a simple notice to the city about their rental. This notice could be a very brief form that could be completed online, providing basic information like address, number of people who will occupy the space during the rental period, and the general dates and length of time for the rental. This information would give the city the opportunity to see how many people are doing very short-term rentals and where and when those rentals are occurring. Further, such information would allow the city to keep track of the impacts of this activity and possibly regulate if those impacts appear to be growing too much or are too concentrated. At the same time, this minimal informational requirement would not significantly deter individuals from doing short-term rentals.

Homeowners who did more significant rentals – say, more than 14 days total, but less than 60 days total, with no more than 21 days consecutively – might have a more substantial burden. The city might want to require those homeowners to review materials about fire safety and ensuring a clean and safe lodging. It might also require a self-inspection for basic housing code safety elements and reporting on that inspection to the city. The city might also want to require reporting about the rental rates being charged (in order to get a sense of demand) and more detailed information about the amount of space being rented within the property and its description (e.g., how many bedrooms, how many bathrooms). Such reporting would increase protections against substandard rentals and again give the city more information about potential impacts from rentals.

Finally, homeowners at the upper end of use – for instance, more than 60 days in total rental time in a year – might be treated more like a traditional hotel. A basic city inspection for health and safety (perhaps by the fire marshal, the health department, or both) might be appropriate, for instance, as well as notice to neighbors about the use of the property (though perhaps not as far as San Francisco’s 300-foot requirement).

Our example here is only a tentative one, more to illustrate the concept of regulating the sharing economy through general permits than to provide a definitive solution. We encourage local and state governments to look to general permit systems for solutions that can ensure that the sharing economy continues to grow but without causing harm to the public interest.


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