Question

From California to New York, legislative bodies across the United States are considering eliminating or reducing...

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 \$26 per hour and pay ATM fees of \$3.00 per transaction. It is estimated that banks would be willing to maintain services for 4 million transactions at \$0.75 per transaction, while noncustomers would attempt to conduct 20 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 \$0.75 cap on the fees banks can charge for noncustomer transactions?

What would be a full economic price of this legislation?

Homework Answers

Answer #1

Noncustomers earn a wage of \$26 per hour and pay ATM fees of \$3.00 per transaction.

Banks would be willing to maintain services for 4 million transactions at \$0.75 per transaction, while noncustomers would attempt to conduct 20 million transactions at that price.

Shortage in transaction volumes = 20 million - 4 million = 16 million

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. So,

Time lost in 16 mn of shortage transaction = 16 mn x 1 minute /mn = 16 minutes = 16 / 60 hours Opportunity cost of 16 minutes = \$ 26 / hour x 16 / 60 = \$6.93

Thus, the non pecuniary cost of legislation=\$6.93 per transaction

Full economic price of this legislation = Ceiling price +opportunity cost = \$ 0.75 +\$ 6.93 = \$ 7.68 / transaction

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