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Economic Analysis of Price Controls, Taxation, and Business Decisions

Exploration of the effects of price controls and taxation on business decision-making.

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    Economic Analysis of Price Controls, Taxation, and Business Decisions 1. You are an aide for the Senate Banking Committee Chairman. He comes to you with a bill that proposes setting limits on what ATM owners can charge non - account holders, over and above what banks charge their own customers. Currently, large banks charge noncustomers an average fee of $1.35 per transaction in addition to the fees the customer's own bank imposes. The Senator asks you to look at a proposal that would place a $0.50 cap on the fees ATM owners can charge noncustomer for accessing their money. If this legislation is 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 shortage of ATMs. The amount of the shortage will equal the difference between the quantity demanded and the quantity supplied at the price ceiling, i.e., the difference between points A and B. Longer lines are likely to develop at ATM machines. Including the value of lost time, the full economic price paid for ATM usage will exceed the current price of $1.35 per transaction. The full economic price is denoted P* in Figure 2 - 4. Note that the actual magnitude of the shortage and full economic price will depend on the relative slopes of the demand and supply curves. Figure 2 - 4 2 . Suppose you are an aide to a U.S. Senator who is concerned about the impact of a recently proposed excise tax on the welfare of her constituents. You explained to the Senator that one way of measuring the impact on her constituents 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 the following estimates of demand and supply: and . a. Graph the supply and demand curves b. 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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