Governments need to put on their thinking caps and develop better policy approaches to grapple with rapid technological changes.

Various technological advances — the Internet, smart phones, ubiquitous wifi connections, satellite navigation systems (GPS), rapid search algorithms, and more — are being combined to create new and exciting digital marketplaces. These platforms bring buyers and sellers together online and enable rapid growth in real-world transactions. In the process, they are transforming the ”œinformal” economy into the ”œsharing” economy.

Two crucial components make these markets work: 1) reduced transactions costs, including easier search; and 2) real-time feedback by both parties, which over repeated transactions, develops reputations and engenders trust.

And with positive network effects — whereby increased supply can create demand, and where more demand can also induce supply — new platforms can scale-up quickly.

These developments present large economic opportunities for their users and have to potential to put the economy’s resources to better use, by facilitating ”œasset-sharing” for idle: cars; brainpower and/or brawn; spare bedrooms and even household tools.

Workers can benefit from more flexible schedules, but for some this comes at the cost of more precarious work and reduced coverage by traditional government safety nets.

This also bring major challenges to established business interests in wide-ranging sectors of the economy from hotels and accommodation (which fear Airbnb) to transportation (Uber, ZipCar and Bixi) to temporary employment services (Task Rabbit and Mechanical Turk), retail (eBay, Amazon and Kijiji), as well as financial services (Kickstarter and other crowd-sourcing campaigns) among others.

Governments are struggling to keep pace. As the business world keeps changing, they are increasingly under the gun to develop appropriate regulatory responses, while also wanting to tap into hidden tax revenue from these transactions. And so this recent paper from the Mowat Centre, written by Sunil Johal and Noah Zon, which explores these fascinating issues is particularly timely and is well worth reading.

At this stage of the game, it’s clear that governments need to develop new approaches to deal with the sharing economy, but it’s far from obvious exactly what those new approaches should entail. We have many open questions and concerns, but little empirical evidence and few answers.

Nonetheless, these authors are able to sketch out the beginnings of some possible policy directions. For starters, the digital ”œpaper” trail that these platforms capture is ultimately the key to tracking these transactions that were previously handled with cash and therefore untaxed. Perhaps, Johal and Zon posit, a bargain could be struck where the government allows these new platforms to legally operate in exchange for their transactions data and adherence to better regulations?

Maybe these disruptive technologies will not only disrupt established business models but they could also improve governments’ antiquated approaches to regulation? This would entail more sunset clauses and automatic regulatory reviews that would give governments the opportunity to better adapt their rules to new realities. And more broadly, the authors hope that with political leadership and better stakeholder engagement, we might shift the bureaucratic culture away from regulatory silos and command and control approaches that state ”œthou shall not do X”, towards a more holistic regulatory approach that relies more on performance-based metrics to gauge success.

We don’t know what new technologies the future will bring, but this much is clear: governments are under increasing pressure to play catch up with what’s already happened in recent years, and technology is showing no signs of letting up.