Query:
The Texas Minimal Building Requirements require that each one plumbing fixtures be WaterSense licensed. Examples of necessities below these requirements embody low-flow taps, bathe heads, and bathrooms.
Suppose, for the sake of argument, that earlier than the requirement for low-flow bathrooms went into impact, putting in a normal-flow bathroom price $250. Suppose additionally that putting in a low-flow bathroom prices plumbers a further $100 below the laws, and that their clients worth the financial savings from low-flow bathrooms at $25 per bathroom.
Illustrate how the demand and provide curves for bathrooms shift on account of the legislation. What occurs to the value of a brand new bathroom (offering a variety of recent costs is enough)? Who beneficial properties from the legislation: plumbers, their clients, 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 meant to handle an externality.
As an illustration, 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 tough. On this case, we could get the usual tragedy of the commons consequence: every particular person considers solely his or her personal prices when utilizing water reasonably than the total social price. In consequence, the aquifer could also be depleted too shortly. For my reply, nevertheless, I’m going to disregard this chance.
One more reason I exploit this query within the classroom is to point out that if shoppers really valued the extra high quality required by the mandate, corporations would have already got an incentive to supply it as a result of doing so could be worthwhile. The query additionally provides 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 bathrooms 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 bathrooms at $25 per bathroom, we are able to consider the demand for low-flow bathrooms as being $25 increased than the demand for regular bathrooms. By the identical logic, we are able to consider the mandate as decreasing provide by $100. The extra price plumbers incur when putting in low-flow bathrooms. Since provide falls greater than demand rises, fewer bathrooms shall be put in, and the market worth will enhance by some quantity between $25 and $100. Each plumbers and their clients are worse off: plumbers obtain much less internet income after overlaying their increased prices, and clients 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 under.
Picture by Bryan P. Cutsinger
The preliminary provide and demand curves, proven in black, mirror market circumstances earlier than the mandate takes impact. The mandate shifts the provision curve leftward by the extra price of offering a low-flow bathroom, illustrated by the crimson provide curve, S′. The crimson demand curve, D′, displays shoppers’ demand for low-flow bathrooms. 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 bathrooms.
We’re advised that the preliminary worth of a rest room is $250, so the mandate should increase the equilibrium worth. How a lot it rises relies on the elasticities of provide and demand, however we all know the brand new worth will lie someplace between $275 (if demand had been completely elastic) and $350 (if provide had been completely elastic).