Economic Condition Global Financial Crisis

Question: Discuss about theEconomic Conditionfor Global Financial Crisis. Answer: Introduction: Share economy is also termed as collaborative consumption. There is no proper definition of Share economy, although there are various rough ideas which are clubbed together in order to get a conceptual framework. People sharing what they have and do not need right away with someone who is in need of it. This way there is a new added value to the good. The allocation of resources is also one of its benefits. It reduces the cost of search of factors of production. Arguably the Global Financial Crisis of 2008 triggered the concept of share economy. In the travel industry, in 2008, Airbnb was founded. It uses the concept of share economy. Airbnb provides an online marketplace helping to find, list, and rent vacation homes for a processing fee. The international expansion started in 2011 with the acquiring German competitor Accoleo. According to the wall street journal, The current value of the company is $30 billion. The basic source of income of Air Bread n Breakfast (Airbnb) is the service charge it demands, for the transactions it makes happen (Geron 2013). Impact: Since the foundation of Airbnb, the company has served more than 30 million guests. The traditional hotels have lost $450 million in direct revenues each year since 2008. The traditional hotel industry is facing a fall in demand since the introduction of Airbnb. Here Airbnb is working as a substitute good of traditional hotels. Hence increasing demand for Airbnb is reducing demand for traditional hospitality industry. The situation is depicted in the figure below (Appendix: Figure 1). As the figure shows, the impact of Airbnb on traditional hotels is negative (Ert, Fleischer and Magen 2016). The traditional hotels are based on more labor intensive technology than Airbnb. Hence, introduction of Airbnb has cost many hotel employees their jobs. The traditional hotels could not afford to keep those employees with the fall in demand for rooms. This also adds an additional cost to the hospitality industry. The other services provided in hotels like foods, beverages, restaurants and bars there are also facing the same reduction in demand due to the same reason. These are the reasons of the fall in revenue in the hospitality industry. The hotels are losing their loyal customers which reduce their income further. The governments earn a large income as a form of taxes from the hospitality industry. The reduction in demand ultimately results in revenue reduction for the government also. The total effect of Airbnb on the hotel industry and the government in New York City alone is about $2.1 billion per annum. With the increasing loss in tax revenue, the governments have to look for other ways to keep the revenue intact, which will cost the government some more (Maurer 2016). Evaluation: According to Airbnb's spokespersons, the organization is just connecting hosts to rent their private property to subletters for short periods. They are targeting a demographic of customers which are different than traditional hospitality industry addresses. This should not affect the hotel industry. But in reality, "Airbnb rentals and high-end hotels might not cross paths," The low-end hotels might be facing the direct negative impact of Airbnb (Guttentag 2015). The cost structure of Airbnb is suitable for the consumers due to the low pricing. Extending a stay in a hotel is costlier than what Airbnb offers. Hence, from the customers' viewpoint, the price elasticity Airbnb is facing is less elastic than the one the hospitality industry is facing. The situation is depicted in the figure below (Appendix: Figure 2). As the Figure 2 shows, a large change in price has a smaller change in the demand for Airbanbs service, as the price for the rooms Airbnb offers is less in general, than the ones are provided by the hotels. The Figure 3 (Appendix: Figure 3) shows the price elasticity situation of traditional hotels. There, a small increase in the price of the hotel rooms is reducing the quantity demanded by a greater margin. People will shift to Airbnbs supply. From the consumers point of view, the services offered by Airbnb are cheaper than the traditional hotels. Hence, they will move on to choosing Airbnbs service. The opportunity cost for renting a hotel room is more. This will bring down the price for hospitality industry. s the Figure 4 (Appendix: Figure 4) above shows, Airbnbs low price will ensure a price reduction for the traditional hotels. This low price is due to exogenous reason. In the figure, the price falls from Price 1 to Price2. It creates a dead weight loss for the society (Wetzstein 2013). Government Intervention Government interventions are there to facilitate any three or all three of the consumer, producer, and society as a whole. According to the New York Attorney General Eric Schneiderman, just like the hotels, Airbnb rentals should be regulated. Airbnb should also face the same tax structure as the traditional hotels. This will reduce the market imbalances caused by the sharing economy structure of Airbnb. One of the main reasons for government intervention is to look out for the consumers. The objective here is to see whether they are getting what they have asked for (Koopman, Mitchell and Thierer 2015). In general government interventions are backed up by the intentions of: Improvement of welfare. Decrease demerit goods supply and increase the same for merit goods. Correction of market failures. Reduction in information asymmetry. Sharing economy was costly previously. But with the time that that scale was lowered. The constant improvement in internet and information technology has reduced the frictions in trading. The sharing economy depends a lot on reputation in the market. A bad name in this market means no more business. Hence like market's "invisible hand," reputation works as an invisible regulator in share economy. It decreases the need for government intervention (Piketty and Ganser 2014). Pros and Cons of Government Intervention: Pros: The government has the power to ensure all the transactions taking place in a market are fair for all of those who are involved in the trading process; the welfare is distributed fairly. Market failures are a frequent problem in sharing economy. The government has the macroeconomic and microeconomic tools, which can resist market failures. The government can use various monetary or fiscal policies to ensure that. Information asymmetry is present in peer to peer services. The government has the potential to ensure that the discrepancy in information is removed. Government intervention can reduce the unemployment caused by the introduction of Airbnb. The hotel employees who lost their jobs due to the sharing economy can be brought back in the production process by the government. Cons: It is not easy to find out a way which will be pareto efficient for the customers, sellers, and the society at the same time. The cost of government intervention can be in the form of a social cost, where a price set by the authorities or the tax structure ensures dead weight loss. Government intervention can be in the form of a tax raise for Airbnb, which will increase the prices for the consumers. Consumers with low budget will face the difficulties due to this (Cheng 2016). Recommendations: The government has to ensure that the tax structure for share economy organizations like Airbnb is revised so that tax revenue remains intact. Special offers and discounts have to be added with the rooms. The government should reduce the dead weight loss fist by creating a price floor. Conclusion: After the Global Financial Crisis, the Airbnb came as an advocate of share economy. It reduced the frictions in the hotel industry. In the process it came heavy on the hospitality industry by decreasing its demand. This has cause loss of jobs for many hotel employees. The share economy so far has made it easier for the consumers to stay at a place in cheaper prices. But this had created some dead weight loss in the process. Airbnb came as substitute goods for the hotels. The impact was mainly felt in low end hotels as the demand for high-end hotels was approximately unchanged. Introduction of Airbnb in hospitality industry has both positive and negative impacts on the economy. It is for the government to decide how the impact can be balanced in such a way that the economic agents involved in this scenario be Pareto efficient. 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