¶ … Sharing Economy
Deadweight Loss
When it comes to the environment impact of humans on the planet, overconsumption is not necessarily the issue; it is overproduction. Overproduction creates a situation where there is more supply than there is demand. Thus, some supply in the marketplace goes unused. This is an inefficient use of resources, or a deadweight loss to society (Investopedia, 2015). There are a number of different reasons why deadweight loss arises. The sharing economy has emerged as a response to deadweight loss that derives from overproduction.
Overproduction occurs in many industries, largely because companies are competing for customers. Demand fluctuates, and companies will typically have more production capacity than they need, in order to be able to meet the peaks in demand and therefore not lose business. Overproduction is therefore inherent in any market economy. But overproduction creates deadweight loss. A market that has a high degree of flexibility will be able to manage overproduction to some extent. The market for clothing in the United States provides an example of how this works. Clothing is initially sold at big department stores or own brand stores at full price. Clothing that is unsold (excess production) is then sold off to discounts and off-price stores (i.e. Marshalls, TJ Maxx) where many of these clothes can find a market among people who are willing to sacrifice selection and newness for a lower price. Clothes that still remain unsold can find their way through other channels, sold at a price just below disposal cost, to vendors who may then sell these clothes in other countries. The system has evolved in a manner to manage overproduction, while extracting maximum profit. If it was possible to perfectly align production with demand, off-price retailers would not have inventory, but a certain amount of overproduction is built into the system (Chernikoff, 2010).
When the system adapts to manage overproduction, it is more economically efficient. There is less...
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