Question

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 $\mathbf{\backslash (}\mathbf{12}$million in withdrawals from other banks’ ATM machines. On average, noncustomers earn a wage of $\mathbf{\backslash )}\mathbf{24}$per hour and pay ATM fees of $\mathbf{\backslash (}\mathbf{3}$per transaction. It is estimated that banks would be willing to maintain services for $\mathbf{5}$million transactions at $\mathbf{\backslash )}\mathbf{1}\mathbf{.}\mathbf{25}$per transaction, while noncustomers would attempt to conduct $\mathbf{19}$million transactions at that price. Estimates suggest that, for every $\mathbf{1}$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, use a graph to carefully illustrate the impact of legislation that would place a $\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{25}$cap on the fees banks can charge for noncustomer transactions.

Short answer

The bank is allowed to charge $6.85 when non-customer transactions take place.

Step-by-step solution

Banking sector

The banking sector operates under various government regulations. It may charge different types of charges for rendering its services.

Impact on non-customer transactions

For a shortage of 14 million transactions, $14$machines travel on machine to another machine. To determine the opportunity cost of traveling to compute, we need the following calculation:

$\begin{array}{c}\mathrm{Opportunitycost}=\frac{24}{60}\times 14\\ =0.4\times 14\\ =5.6\end{array}$

Thus, the opportunity cost of traveling is $5.6.

To calculate the full economic prices, we need the following calculation:

${\mathrm{P}}^{\mathrm{F}}={\mathrm{P}}^{\mathrm{C}}+({\mathrm{P}}^{\mathrm{F}}-{\mathrm{P}}^{\mathrm{C}})$

${\mathrm{P}}^{\mathrm{C}}=\mathrm{\$}1.25;({\mathrm{P}}^{\mathrm{F}}-{\mathrm{P}}^{\mathrm{C}})=\mathrm{\$}5.6$

$\begin{array}{c}{\mathrm{P}}^{\mathrm{F}}={\mathrm{P}}^{\mathrm{C}}+({\mathrm{P}}^{\mathrm{F}}-{\mathrm{P}}^{\mathrm{C}})\\ =\mathrm{\$}1.25+\mathrm{\$}5.6\\ =6.85\end{array}$

Thus, the full economic price for legislation is $6.85.

The following graph clarifies the explanation. With a price cap of $1.25, a maximum price of $6.85 can be charged in the new system.

Based on the graph, we can conclude that the price ceiling restricts the quantity available to role="math" localid="1655273090787" $5$million. The dead weight loss will decrease, and the bank will charge $6.85 when non-customer transactions occur.