What Is the Sharing Economy?

The Sharing Economy Explained in Less Than 5 Minutes

Man checking delivery address
•••


vgajic / Getty Images

The sharing economy is an economic model that allows consumers to share in the creation or use of products, goods, and services. This sharing often takes place across digital platforms, such as online communities or apps.

If you participate in gig work, you might be part of the sharing economy. Even if you don't, the sharing economy can still affect you financially. Here's a closer look at how this economic model works.

Definition of the Sharing Economy

What exactly is the sharing economy? Here's one definition: "A shared economy model allows consumers to share creation, production, distribution, trade, and consumption of goods and services."

The IRS views the sharing economy through the lens of gig work. Using the terms “gig economy” and “sharing economy” interchangeably, the IRS defines both as "activity where people earn income providing on-demand work, services, or goods," often through a website or app. According to the IRS, gig work includes:

  • Driving for a ridesharing service
  • Renting out property
  • Running errands or completing short tasks
  • Selling things online
  • Providing creative or freelance services

Income earned from gig work is taxable and must be reported as such on your tax return.

  • Alternate names: Gig economy, shared economy, peer economy, shareconomy, collaborative economy, collaborative consumption

How the Sharing Economy Works

In a broad sense, the sharing economy works through mutual cooperation. Digital platforms such as websites or apps make it possible for people to connect with one another to share services or goods.

For example, Uber is one of the best-known examples of a sharing economy model at work. A rider opens the Uber app and enters their destination. That rider is matched with an Uber driver, an independent contractor or gig worker who drives the rider to their destination. In exchange for using their personal vehicle and their time, the driver collects a base fare from Uber and could receive a tip from the rider. The rider, meanwhile, benefits from being able to reach their destination by sharing someone else's vehicle.

Because the sharing economy spans so many activities, regulating it at a federal level has been difficult. Some of the key issues raised by state and federal regulators and lawmakers center on:

  • The safety of people who participate in sharing economy activities, such as rideshare drivers and passengers.
  • Labor laws and the classification of gig workers.
  • Taxation of gig workers and companies that contract with them.
  • Data collection and privacy of people who use sharing economy apps or platforms.
  • Discriminatory practices

Two of the biggest segments of the sharing economy to come under regulatory scrutiny are ride-sharing and vacation rentals. Uber and Lyft fought extensively against regulations that would have required them to classify drivers as employees. Airbnb hosts, meanwhile, have to navigate local rules and regulations about short-term rentals.

Critics of the proposed PRO Act, which would substantially change labor laws, have argued that it's a direct threat to the sharing economy.

Examples of the Sharing Economy

As mentioned, ride-sharing and short-term home rentals are two of the most visible examples of the sharing economy. Airbnb, for example, allows homeowners to rent out part or all of their homes to individuals for short periods of time.

Here's how it works. Airbnb provides an online platform where homeowners with extra space can connect with people who want to rent it. When someone rents a room or a full home, they pay the homeowner, and Airbnb collects a fee for its service in facilitating the transaction. Other vacation rental platforms such as Homeaway and Booking.com work similarly.

Other sharing economy examples include:

  • Workspace sharing, like the kind offered by Wework
  • Reselling via apps or websites, like eBay or LetGo
  • Crowdfunding sites, like GoFundMe
  • Peer-to-peer lending sites, like Prosper or LendingClub
  • Equipment rental apps, like Sparetoolz
  • Clothing rental services, like Rent the Runway or Tulerie
  • Delivery services, like DoorDash or Seamless
  • Grocery shopping and delivery services, like Instacart or Postmates

While sharing economy apps can provide convenient access to services or goods, consumers may pay fees to use them.

Pros and Cons of the Sharing Economy

The sharing economy offers both advantages and disadvantages for consumers and for gig workers. Here's a look at the pros and cons of a shared economic model.

Pros
  • Potentially lower prices for goods and services

  • Gig work can provide extra income 

  • Increased access to goods and services

Cons
  • Safety concerns for both workers and customers

  • Lack of regulation can be problematic

  • Data and privacy risks may exist

Pros Explained

  • Potentially lower prices for goods and services: Sharing resources can potentially translate to lower costs for consumers. For example, spending $20 each week on shared rides could be less expensive than owning, insuring, and maintaining a vehicle.
  • Gig work can provide extra income: One in three Americans has at least one side hustle, and many of them work in the sharing economy. Gig work can provide much-needed extra income if you experience a pay cut or if stagnating wages make it hard for you to keep up with a rising cost of living.
  • Increased access to goods and services: The sharing economy can make it easier to obtain goods or services. For example, if you spent most of 2020 staying home except for essential outings, you might have turned to a grocery delivery service to keep your pantry stocked. That kind of convenience is a hallmark of the sharing economy.

Cons Explained

  • Safety concerns for both workers and customers: Performing gig work or hiring a gig worker can pose safety risks. An Uber safety report released in 2019, for instance, revealed nearly 6,000 sexual assaults and 19 deaths involving drivers and riders during 2017 and 2018.
  • Lack of regulation can be problematic: Changing regulations can bring uncertainty for both gig workers and consumers who use sharing economy platforms. If you rent out a room on Airbnb, for example, an unexpected change to local laws could curb your earning potential.
  • Data and privacy risks may exist: Cybersecurity is also a concern for people who use sharing economy platforms. Sharing information with an app can be risky if it's not properly encrypted.

Key Takeaways

  • The sharing economy involves the sharing of resources, often through online or mobile platforms.
  • Key examples of the sharing economy include ride-sharing, short-term rentals, coworking, and grocery delivery services.
  • Performing gig work can raise concerns over things like safety and privacy, as well as taxation and how to report income.