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A price floor

Suppose that a price floor is introduced in this market. Then consumers of legal services would demand less at this higher price, but producers would want to supply more. The market would be demand constrained. Since the demand curve has unit elasticity, expenditure on legal services would not change. Producer surplus would rise, however, since producer revenue would remain the same but total costs would fall. Once again, there would be an overall welfare gain since fewer legal services are supplied and the total cost of the economic resources that are devoted to providing legal services falls.

An aggregate quantity constraint

Suppose that a quota is placed on the aggregate supply of legal services - effectively a barrier to entry in this market. The supply curve is effectively perfect inelastic at this new aggregate production level. This drives the equilibrium price up, but again leaves total expenditure on legal services unchanged. Producers are better off, since they receive the same revenue but their total costs are lower. But since total quantity is lower, aggregate welfare must be higher with an aggregate quantity constraint. Thus, an aggregate quantity constraint can be welfare improving.

Summary

This section has constructed a model of the market for lawyers and legal services, in which it was assumed that all activities undertaken by lawyers were purely redistributive. This assumption drives the welfare properties of the model. More generally, it would be possible to examine a similar model in which legal services still impose costs on the economy but also assist parties in negotiating efficient agreements. If this additional assumption is added, then it is no longer true that welfare is uniformly decreasing in the number of lawyers employed in equilibrium. For a sufficiently low level of legal services, the welfare gains that came about from assisting the parties in implementing efficient agreements would outweigh the welfare costs. Eventually, however, as the marginal and total costs of legal services rise, the costs would begin to exceed the benefits. This is exactly the hypothesis put forward by Magee (1992) and which he argues holds empirically.

 
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