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 $12 million in withdrawals from other banks' ATM machines. On average, noncustomers earn a wage of $22 per hour and pay ATM fees of $375 per transaction It is estimated that banks would be willing to maintain services for 5 million transactions at $1.25 per transaction, while noncustomers would attempt to conduct 21 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 non pecuniary cost of legislation that would place a $125 cap on the fees banks can charge for noncustomer transactions? What would be the full economic price of this legislation?

Explanation / Answer

Lets first summarize all the datails which are given to us:

Non-Customers Withdraw $12 million from other Bank's ATM Machines @ $3.75 per transaction. So at the market price ($3.75) of transaction, Customers demand $12 million worth transaction and Banks supply the same i.e. $12 million worth transactions, so market is in equilibrium at this rate.

Now, govt. kicks into the system, and tries to put a Price ceiling at $1.25.

Lets see what happens then,

At this price obviously, Banks would supply less and Customers would demand more.

At the price of $1.25 per Transaction, Banks are ready to supply only 5 millions transactions while customers are ready to do 21 million transactions.

We had equilibrium price = $3.75 and Price ceiling by govt and New Price = $1.25

See there is a gap of 16 Million Transactions.

For every 1 million gap in the transactions, a typical customer have to waste 1 minute to move to next atm.

So for 16 million gap in the transaction, A typical customer have to spend 16 minutes to move to next ATM.

Now what is the non-pecuniary cost of this legislation?

Here look at the opportunity cost of spending those 16 minutes going from one atm to another atm,

Non customer can earn an hourly wage of $22

So in 16 minutes he can earn = ($22/17)*60 =$6.23 or $6.

So this wage which is lost due to this legislation is Non-pecuniary cost of this new legislation by the government.

(b) What is the full economic price of this legislation?

We can state the full economic price as the sum of price that non customers pays to the Banks plus the opportunity cost lost by them.

Economics Price per transaction = Non Pecuniary Cost + Per Transaction Cost

= $6.23 + $1.25 = $7.48 per transaction.

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