ATM FEE

Instructions:-

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 $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 $1.25 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 $1.25 cap on the fees banks can charge for noncustomer transactions?

Solution

ATM FEE

Figure illustrates the relevant situation. The equilibrium price is $2.75, but the ceiling price is $0.75. Notice that, given the shortage of 12 million transactions caused by the ceiling price of $0.75, the average consumer spends an extra 12 minutes traveling to another ATM machine. Since the opportunity cost of time is $20 per hour, the non-pecuniary price of an ATM transaction is $4 (the $20 per hour wage times the fractional hour, 12/60, spent searching for another machine). Thus, the full economic price under the price ceiling is $4.75 per transaction.