Welfare effects of policy interventions in the market for legal services

This section considers some possible policy interventions in the market for legal services. Given the previous results, it should not be surprising that interventions in this market can improve - rather than reduce - economic well-being.

A tax on purchases of legal services

Suppose that an ad valorem tax on the purchases of legal services is implemented, which increases the consumer price to P0(1 +1). This drives a wedge between consumer and producer prices, and fewer legal services are consumed and produced. Total consumer spending on legal services (inclusive of tax) does not change, since the market demand curve in equation has an elasticity of one. The welfare loss is now lower than it was before the tax, because the total opportunity cost of producing the new quantity of legal services is lower. Thus, a tax on legal services can be welfare improving.

A price ceiling

Suppose that a price ceiling is introduced in this market. Then consumers of legal services would demand more at this price, but producers would reduce their supply, and the market would be supply constrained. Producer surplus would fall, and expenditure on legal services would also fall. Ordinarily, the ability to consume a good at such a low price would represent a welfare gain to consumers (assuming the good was rationed to high valuation consumers). But this is not the case here: the expenditure on legal services confers no benefit in total and is simply transferred as revenue to producers. There is an overall welfare gain, however, since fewer legal services are supplied and the total cost of resources devoted to providing legal services falls.

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