Introduction
Emerging innovation in a free society springs out of the restless yearning for newer, better, faster ways. All it takes is for someone to ask “Why hasn’t someone thought of this before?” and sometimes the next great product or service is born.
What can stop them, however, is unimaginative policymakers resorting to regulation whenever a new idea emerges. Whereas the entrepreneur may have happened upon an idea that’s never occurred to anyone else, the rush to regulate is an idea that’s happened far too often: We don’t understand it, and we don’t know if it will make things better, so let’s block it before it upsets the way things are done around here.
Technology widely available over smartphones and the internet has given rise to new marketplaces – platforms – by which people can obtain and offer goods and services. They include ridesharing, homesharing, and many, many other things. The emergence of app-based marketplaces is given several names: the gig economy, the sharing economy, or in the words of Duke University professor Michael Munger, author of Tomorrow 3.0: Transaction Costs and the Sharing Economy, the “platform revolution.”
Platforms work by significantly reducing transaction costs, which are the economic costs of conducting a trade not just monetary costs like sales taxes, but also time spent searching, uncertainty, hassle, distrust, etc. Platforms reduce transaction costs so much so that we see transactions happening now that otherwise would never have occurred or even been imagined. They’re not only connecting potential riders with drivers and potential guests with hosts, they’re even connecting dog owners with potential dog walkers, residents with home delivery services from local restaurants and stores, and even families with welcoming swimming pool owners.
Fast-emerging new forms of competition may please consumers, but they upset existing businesses and worry local and state officials about unregulated providers. Policymakers’ answer is often, unfortunately, to saddle the new marketplaces with all the red tape that’s afflicting the older marketplaces – and sometimes add new restrictions. Ill-conceived regulations can persist and have ongoing negative effects on local economies, consumers, and entrepreneurs.
Instead, policymakers should be on the lookout for persistent regulatory obstacles already blocking the way to the hustlers and go-getters, old and new, in their communities. For example, protectionist food truck regulations needlessly prevent mobile restaurant offerings and food diversity. Local entry regulations and public service restrictions stifle business opportunities in cities and counties, and worse, they can vary wildly from one jurisdiction to the next. Outdated zoning, rent controls, and other regulations are preventing people in high-demand urban settings from providing all kinds of affordable housing arrangements.
Local swimming pool owners saw an example of the knee-jerk regulatory impulse over the summer of 2023. On July 24, WRAL reported on the swimming pool sharing app Swimply, telling viewers they could “Use app to rent a pool for the day.” On August 31, WRAL was reporting “People renting backyard pools told to stop operating ‘public pools.” The state Department of Health and Human Services had issued guidance that renting out a private pool made it “public.” Not all jurisdictions WRAL spoke with were treating the DHHS guidance as binding, however. (For a discussion of the difference between regulatory guidance and actual, duly created regulation, see the “Red Tape and Regulation” section.)
In June 2015 the Federal Trade Commission (FTC) held a workshop on the sharing economy to examine the regulatory, competitive, consumer protection, and other economic issues of emerging marketplaces, receiving over 2,000 public comments in response. The FTC recommended a cautionary approach to regulation, prescribing it “only when there is evidence regulation is needed” and advising that it be “narrowly tailored” and “no more restrictive than necessary.”
With emerging ideas, innovations, and platforms, policymakers should still adhere to the wisdom of the Hippocratic Oath: “First, do no harm.”
Key Facts
- In 2021 the General Assembly created a regulatory sandbox for finance and insurance products and services. The law waives some regulations for newly emerging products and services for 24 months to give them a test run while keeping other consumer protections in place. Several states and many nations around the world have started regulatory sandboxes for certain industries. Meanwhile, South Korea and the state of Utah have highly successful, open-ended regulatory sandboxes.
- Many platforms are often regulated by their own users, with buyers and sellers rating each other. Users are more likely to trust those ratings from users like themselves than they would trust decisions by unknown bureaucrats. Trust is a key component in how platforms work — to stay viable, they have to attract and keep buyers and sellers.
- Tight restrictions on homesharing imposed by Asheville and Raleigh led to the General Assembly passing a law in 2019 limiting the ability of local governments to regulate properties subject to the state Vacation Rental Act.
- Cities and towns across North Carolina have tried to “protect” brickand-mortar restaurants from food trucks. For example, in 2021, Farmville imposed daily operating fees of $75, limited how many days a week a food truck could be in town, and stipulated how far it must be from existing restaurants. In 2021, Jacksonville began allowing food trucks outside of festivals and events, but with annual permits of $300 for residents and $500 for nonresidents. In 2020, Boone debated banning food trucks in downtown. Under threat of a lawsuit in 2018, Carolina Beach scrapped its prohibitions on food trucks from out of town or unaffiliated with existing restaurants.
- In 2019, the California legislature sought to quell the gig economy with a highly restrictive bill (Assembly Bill 5) that defined most independent contractors, freelancers, and platform entrepreneurs (“gig workers”) who contract with companies as those company’s employees and therefore subject to the full scope-of-employment regulations. The new annual payroll expenses imposed by California’s law were enormous: an estimated $6.5 billion. The new law was so disruptive, however, that it prompted a 2020 law exempting a long list of job categories, followed by a referendum that same year to grant independent contractor status to app-based ridesharing drivers (such as for Uber and Lyft) and delivery services (such as for DoorDash).
Recommendations
1. Expand North Carolina’s regulatory sandbox to all industries, not just finance and insurance.
The regulatory sandbox helps foster innovation without smothering it with unnecessary regulation.
2. Correct regulatory imbalances not by piling burdens on emerging marketplaces, but by lessening burdens on existing ones.
Established providers have a point when they object to new competitors figuring ways around regulations that have road-blocked them. The answer is to remove the roadblocks, not install new ones.
3. Resist the rush to regulate emerging consumer options and new ideas.
Regulation for regulation’s sake can stifle improvements for no good reason.
How Does the Regulatory Sandbox Work?
The Platform Revolution, Connecting People Who Didn’t Know They Needed Each Other
