Question:
In Texas, the Minimum Construction Standards dictate that all plumbing fixtures must bear the WaterSense certification. This includes mandates for low-flow faucets, showerheads, and toilets.
Let’s entertain a hypothetical: before the low-flow toilet mandate was enacted, the installation cost for a standard-flow toilet stood at $250. Additionally, under the new regulations, plumbers incur an extra $100 when installing low-flow toilets, while customers appreciate the water savings from these fixtures at a value of $25 per toilet.
Visualize the impact of this law on the demand and supply curves for toilets. How does this legislation affect the price of a new toilet? A range of new prices will suffice. Who benefits from this law: the plumbers, their customers, both parties, or neither? Please provide a rationale for your conclusion.
Solution:
This scenario serves as an excellent teaching tool in my classroom to illuminate various economic principles. Firstly, it raises the question of whether product-quality mandates genuinely enhance consumer welfare. I use the term unclear because while these mandates aim to rectify an externality, the effectiveness can be questionable.
Take, for instance, a point raised by my former colleague at Texas Tech University, Adam Martin. He noted that regions like West Texas heavily depend on the Ogallala Aquifer for their water supply. Since the aquifer is a common resource, managing its use becomes complex. In such cases, we often witness the classic tragedy of the commons: individuals prioritize their own water needs without considering the broader social costs, leading to potential over-extraction. In this analysis, however, I will set aside this concern.
This question also provides an opportunity to discuss whether consumers would have already demanded higher quality products if they truly valued them. If there were a significant appetite for enhanced quality, businesses would have likely pursued these improvements for profit. Furthermore, the regulation functions similarly to a tax—rather than funneling money to the government, it enriches the suppliers of low-flow toilets or, more broadly, those delivering the added quality. Unfortunately, like a tax, this mandate creates a deadweight loss.
Given that consumers value the water-saving features of low-flow toilets at $25 each, we can infer that the demand for these toilets is effectively $25 higher than that for standard toilets. Conversely, the mandate imposes a $100 increase in supply costs for plumbers. Because the supply reduction exceeds the demand increase, fewer toilets will be installed, leading to an increase in market price somewhere between $25 and $100. In this scenario, both plumbers and customers emerge worse off: plumbers earn less net revenue after covering higher installation costs, while customers pay more than the perceived value of the improvement. This culminates in a deadweight loss, representing the missed mutually beneficial transactions that could have occurred in the absence of the mandate.
To visualize this, consider the supply and demand graph below.
Image by Bryan P. Cutsinger
The black curves in the graph represent the market dynamics prior to the mandate. The law shifts the supply curve leftward, as depicted by the red supply curve, S′, reflecting the added costs of low-flow toilet installation. Meanwhile, the red demand curve, D′, illustrates consumer interest in low-flow toilets. The vertical gap between D′ and the original demand curve, D, signifies the additional value consumers associate with the water savings offered by low-flow toilets.
With the initial price of a toilet set at $250, the mandate is bound to elevate the equilibrium price. The precise increase hinges on the elasticities of supply and demand but will undoubtedly fall between $275 (if demand is perfectly elastic) and $350 (if supply is perfectly elastic).
