Economic Analysis of Price Controls, Taxation, and Business Decisions

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Economic Analysis of Price Controls, Taxation, and Business Decisions1. You are an aide for the Senate Banking Committee Chairman. He comes to you with a bill that proposessetting limits on what ATM owners can charge non-account holders, over and above what banks charge theirown customers. Currently, large banks charge noncustomers an average fee of $1.35 per transaction inaddition to the fees the customer's own bank imposes. The Senator asks you to look at a proposal that wouldplace a $0.50 cap on the fees ATM owners can charge noncustomer for accessing their money. If this legislationis enacted, what would be the likely effects?The proposal is, in essence, an effective price ceiling of $.50. As shown in Figure 2-4, this will create a shortageof ATMs. The amount of the shortage will equal the difference between the quantity demanded and thequantity supplied at the price ceiling, i.e., the difference between points A and B. Longer lines are likely todevelop at ATM machines. Including the value of lost time, the full economic price paid for ATM usage willexceed the current price of $1.35 per transaction. The full economic price is denoted P* in Figure 2-4. Note thatthe actual magnitude of the shortage and full economic price will depend on the relative slopes of the demandand supply curves.Figure 2-42. Suppose you are an aide to a U.S. Senator who is concerned about the impact of a recently proposed excise tax onthe welfare of her constituents. You explained to the Senator that one way of measuring the impact on herconstituents is to determine how the tax change affects the level of consumer surplus enjoyed by the constituents.Based on your arguments, you are given the go-ahead to conduct a formal analysis, and obtain thefollowingestimates of demand and supply:and.a.Graph the supply and demand curvesb.What are the equilibrium quantity and equilibrium price?c.How much consumer surplus exists in this market?d.If a $2 excise tax is levied on this good, what will happen to the equilibrium price and quantity?

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