From California to New York, legislative bodies across the United States are con

Question

From California to New York, legislative bodies across the United States are considering eliminating or reducing the surcharges that banks impose on noncustomers, who make $10 million in withdrawals from other banks’ ATM machines. On average, noncustomers earn a wage of $22 per hour and pay ATM fees of $3.75 per transaction. It is estimated that banks would be willing to maintain services for 6 million transactions at $1.75 per transaction, while noncustomers would attempt to conduct 23 million transactions at that price. Estimates suggest that, for every 1 million gap between the desired and available transactions, a typical consumer will have to spend an extra minute traveling to another machine to withdraw cash.

Based on this information, what would be the nonpecuniary cost of legislation that would place a $1.75 cap on the fees banks can charge for noncustomer transactions?

Instructions: Round your answer to the nearest penny (2 decimal places).

$

What would be the full economic price of this legislation?

$

Explanation / Answer

The equilibrium price is $3.75 and the ceiling price is $1.75.

Given in the problem the shortage of 17 million transactions (23 - 6) caused by the ceiling price of $1.75, the average consumer spends an extra 17 minutes traveling to another ATM machine.

Non-pecuniary price of an ATM transaction = (17 / 60) x 22

= $6.23

Thus, the full economic price under the price ceiling is $7.98 per transaction.

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