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 $14 million in withdrawals from other banks’ ATM machines. On average, noncustomers earn a wage of $26 per hour and pay ATM fees of $3.25 per transaction. It is estimated that banks would be willing to maintain services for 6 million transactions at $1.50 per transaction, while noncustomers would attempt to conduct 22 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 $1.50 cap on the fees banks can charge for noncustomer transactions?

Instructions: Enter your responses rounded to the nearest penny (two decimal places).

$   

What would be the full economic price of this legislation?

Answer 1

From the above information we get,. The equilibrium price =$3.25. And the ceiling price =$1.50.The shortage caused by ceiling price= 22 million -6million=16mn. Therefore,we can say that the average consumer spends an extra 16 minutes travelling to another ATM. Then,the opportunity cost of looking for other ATM for non customer is= $26 per hour (as his average earning) Based on these , we can find out the non pecuniary cost on non customer transaction as = opportunity cost × fraction of hour spent on looking for other ATM . That is= 26× 16/60=$ 6.93.And the full economic price= Non pecuniary cost+ ceiling price That is = 6.93+ 1.50=$ 8.43.