The Texas Minimal Development Requirements require that each one plumbing fixtures be WaterSense licensed. Examples of necessities beneath these requirements embody low-flow taps, bathe heads, and bogs.
Suppose, for the sake of argument, that earlier than the requirement for low-flow bogs went into impact, putting in a normal-flow rest room price $250. Suppose additionally that putting in a low-flow rest room prices plumbers an extra $100 beneath the laws, and that their prospects worth the financial savings from low-flow bogs at $25 per rest room.
Illustrate how the demand and provide curves for bathrooms shift because of the legislation. What occurs to the worth of a brand new rest room (offering a variety of latest costs is adequate)? Who good points from the legislation: plumbers, their prospects, each, or neither? Justify your reply.
Resolution:
I exploit this query within the classroom to focus on a number of concepts. For one, it’s not clear that product-quality mandates essentially make shoppers higher off. I say not clear as a result of such mandates could also be supposed to handle an externality.
For example, my former colleague at Texas Tech College, Adam Martin, as soon as identified that West Texas—like a number of different areas of the American West—depends on the Ogallala Aquifer for water. Since nobody owns the aquifer, pricing its use is troublesome. On this case, we could get the usual tragedy of the commons end result: every particular person considers solely his or her personal prices when utilizing water fairly than the total social price. Because of this, the aquifer could also be depleted too rapidly. For my reply, nonetheless, I’m going to disregard this chance.
Another excuse I exploit this query within the classroom is to point out that if shoppers actually valued the extra high quality required by the mandate, companies would have already got an incentive to offer it as a result of doing so can be worthwhile. The query additionally gives an opportunity to debate the incidence of the mandate. In impact, the regulation operates like a tax—however as an alternative of producing income for the federal government, it generates income for the suppliers of low-flow bogs on this case, or extra typically, for whoever gives the extra high quality. Like a tax, the mandate creates a deadweight loss.
Since shoppers worth the water financial savings from low-flow bogs at $25 per rest room, we will consider the demand for low-flow bogs as being $25 larger than the demand for regular bogs. By the identical logic, we will consider the mandate as decreasing provide by $100. The extra price plumbers incur when putting in low-flow bogs. Since provide falls greater than demand rises, fewer bogs will probably be put in, and the market value will improve by some quantity between $25 and $100. Each plumbers and their prospects are worse off: plumbers obtain much less internet income after overlaying their larger prices, and prospects pay greater than the worth they place on the advance. The result’s a deadweight loss, reflecting the discount in mutually helpful trades that might have occurred with out the mandate.
We will illustrate this concept utilizing the provide and demand diagram beneath.
Picture by Bryan P. Cutsinger
The preliminary provide and demand curves, proven in black, mirror market situations earlier than the mandate takes impact. The mandate shifts the availability curve leftward by the extra price of offering a low-flow rest room, illustrated by the crimson provide curve, S′. The crimson demand curve, D′, displays shoppers’ demand for low-flow bogs. The vertical distance between D′ and the preliminary demand curve, D, represents the extra worth shoppers place on the water financial savings from low-flow bogs.
We’re instructed that the preliminary value of a bathroom is $250, so the mandate should elevate the equilibrium value. How a lot it rises will depend on the elasticities of provide and demand, however we all know the brand new value will lie someplace between $275 (if demand had been completely elastic) and $350 (if provide had been completely elastic).
