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Welcome to Accenture, we are happy to have you join our public sector consulting arm The Senate Banking Committee is considering a limit placed on what automated teller machine (ATM) owners can charge in terms of usage fees. Currently, the national average AIM fee is $2.50, and the proposed imitation is to be set at $1.50. After scaling quantities in the millions, we have estimated that the current inverse demand for ATMs can be represented as follows: P=5-1 25Qd, while the estimated inverse supply for ATMs can be represented as follows: P=0.5+Qs. We have some local representatives that are interested in lobbying against the proposed limitation on ATM fees So we would like you to thoroughly analyze the impact that the limitation would have on the market, and offer evidence that might sway the Senate Banking Committee to reject the proposed ATM fee limitation. Are there any hidden costs to such a proposal, as it seems the fee reduction would only benefit the customer?

Explanation / Answer

The quantity of ATM demanded at price = $2.50 is equal to :

2.50 = 5 - 1.25Qd

Qd = 2.

According to the supply equation QS at 2.50 is also equal to 2 units.

However when price falls to $1.50

by the demand equation 1.50 = 5 - 1.25Qd

Qd = 2.8

At price = $1.50 quantity of supply of ATMs = 1 unit.

Thus clearly there would be a shortage of 2.8 - 1 = 1.8 units.Thus this reform is not at all desired as even though people are ready to pay a higher price for more units of ATMs government is restricting their usage by putting a cieling.At such cieling suppliers are not ready to provide ATM services greater than 1 unit.Thus had the government not imposed the cieling the overall welfare in the economy would have been maximised as consumers would have got whatever they demanded and producers would have sold whatever they had to at the desired price.

Imposition of cieling creates a dead weight loss in the economy.The dead weight loss = area of the triangle which is formed by higher willingness to pay than $1.50, by consumers for a higher no of units over and above 1 unit and below 2.8 units.

Though a limit on price is intended to benefit consumers it creates a shortage for ATMs thus leading to a dead weight loss and thus imposing a hidden cost on the society.

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