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The Durbin Amendment highlights multiple economic tenets; namely how price controls distort economic activity by artificially manipulating the supply and demand equilibrium, the incidence v. burden of taxes and fees, and supply-side drag due to reductions in innovation. Further explication of these concepts is warranted to illustrate the externalities of government intervention.
The interchange fee is fundamentally a price control, with a ceiling placed on the debit card transaction fee of 21 cents. A price ceiling in this case is placed below the market rate for interchange fees of 44 cents, and causes merchants to increase quantity demanded at the lower price, but equivocally witnesses banking institutions decreasing quantity supplied. As with all price ceilings, shortages result as the equilibrium price and quantity are distorted. In this case the shortages appear not only in transactions, as "consumers are encouraged to shift from debit cards to more profitable alternatives such as credit cards" (Zywicki, T. September 29, 2011. PP. 2), but also with banks recouping lost revenue through higher fees on other bank services.
As just noted, the impact of the price control is the change in behavior of buyers and sellers in what was an equilibrium market, but in typical fashion the effect is harmful to those the regulation meant to protect. Here the idea is that the incidence of a tax, fee, or price control is far different from the burden i.e. those who ultimately pay its cost. In the attempt to help merchants, the Durbin Amendment has in fact increased interchange fees for the small business owners. "Overnight, the variable costs of a transaction have tripled…my
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