Pricing Plumbing: Cutsinger’s Solution – Econlib

Question:

The Texas Minimum Construction Standards mandate that all plumbing fixtures must be WaterSense certified, including low-flow faucets, shower heads, and toilets. Let’s consider the impact of the requirement for low-flow toilets on the market.

Before the mandate, the cost of installing a normal-flow toilet was $250. However, installing a low-flow toilet now costs plumbers an additional $100 due to the regulations. Customers value the water savings from low-flow toilets at $25 per toilet.

Discuss how the demand and supply curves for toilets shift as a result of the law. What happens to the price of a new toilet? Who benefits from the law: plumbers, customers, both, or neither?

Solution:

This question raises important economic concepts. Product-quality mandates may not always benefit consumers, especially if they are intended to address externalities like water conservation.

In this case, the mandate creates a deadweight loss as it operates like a tax, generating revenue for suppliers of low-flow toilets. The demand for low-flow toilets increases by $25, while the supply decreases by $100 due to the additional cost for plumbers. As a result, the market price of a new toilet will rise between $275 and $350, depending on the elasticities of supply and demand.

Both plumbers and customers are worse off under the mandate. Plumbers earn less net revenue, and customers pay more than the value they place on the water-saving feature. The outcome is a reduction in mutually beneficial trades, leading to a deadweight loss in the market.

The diagram below illustrates the shift in supply and demand curves due to the mandate:

The red supply curve, S’, represents the additional cost of providing low-flow toilets, while the red demand curve, D’, reflects consumers’ preference for water-saving fixtures. The equilibrium price of a new toilet increases from $250 to a range between $275 and $350, causing both plumbers and customers to incur losses.