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Price Ceiling Effects

From California to New York, legislative bodies across the United States are considering eliminating or reducing the surcharges that banks impose on non-customers, who make $10 million in withdrawals from other banks' ATM machines. On average, non-customers earn a wage of $20 per hour and pay ATM fees of $2.75 per transaction. It is estimated that banks would be willing to maintain services for 4 million transactions at $0.75 per transaction, while non-customers would attempt to conduct 16 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 $0.75 cap on the fees banks can charge for non-customer transactions?

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

$

What would be the full economic price of this legislation?

$

Solution Preview

See the attached file. Note that equilibrium is where supply and demand curves intersect, without market interference. With the price ceiling, a shortage is created.

Non-pecuniary prices are based on non-monetary value to consumers of having to look for another machine. This is the value ...

Solution Summary

Graphing to determine the the economic and non-pecuniary cost of a price ceiling on the price of ATM transactions.

$2.19