The War on Prices: “Junk fees” edition

One of the DFL’s signature achievements in the last legislative session was a ban on so-called “junk fees.” The Star Tribune reports:

“All of us have seen this, especially online,” Walz said before signing the bill. “Seeing a price but then by the end of it there’s all kinds of things that have been added on to it and then there’s a countdown clock that tells you need to get it and do this now.”

…

The bill’s sponsors said junk fees are everywhere, from most online purchases to additional charges added to restaurant bills, such as health and wellness fees, that have become common practice in the Twin Cities since the pandemic.

“We said we really need a whole-of-the-economy approach, because junk fees aren’t just for Taylor Swift concerts anymore,” said Rep. Emma Greenman, DFL-Minneapolis, one of the sponsors of the bill.

“Call it a convenience fee, call it a usage fee, call it a facility fee, call it an inflation fee, call it whatever you want,” she added. “It’s a junk fee if you have to pay it in order to get the good or service but you’re not told about it until the end.”

This is one of those things that probably sounds better the less you think about it. Economics is, however, the discipline of thinking logically about things most people don’t think logically about.

According to the Minnesota Reformer:

Beginning next year, Minnesota businesses can no longer add service fees, health and wellness surcharges or other mandatory charges to customers’ bills at the end of a transaction.

…

Restaurants and hotels may still charge a mandatory gratuity — which is different from service fees because the revenue goes directly to the workers, not to the employer — as long as the percentage is clearly advertised alongside any pricing information. “Health and wellness” charges or other fees added to restaurant bills would be banned, even if the proceeds are used to support wages and benefits for employees. 

But, as Cato Institute economist Ryan Bourne writes in the excellent new book “The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy,” these “partitioned fees,” such as “health and wellness” fees which, Kare 11 reported in 2018, “restaurants are adding…to help offset the rising costs of health insurance:”

…can sometimes provide customers with important contextual information. Consumers often have little idea of the costs of providing goods and services. Itemizing a bill, even if the total price remains the same, may provide crucial transparency. For example, restaurants sometimes include surcharges on bills to reflect large local minimum wage rises. Such actions help explain to customers the underlying reason for price increases, dispelling false accusations of “greed” or the abuse of monopoly power. Banning partitioned pricing can therefore actually hide information from customers.

Indeed, “banning” or “abolishing” “junk fees” doesn’t mean those fees go away, it simply means that they get rolled into the overall price. Because of this, Bourne writes:

…the primary effect of banning additional fees in competitive markets would be higher basic prices. Shifting to that kind of price structure might redistribute money between types of customers, but the total amount spent by American households would be largely unchanged. Even in sectors where firms have market power, in fact, policing one part of a firm’s price doesn’t change the fundamental industry power dynamics, so the total price consumers face would be largely unaffected.

So, while it might be true, as the Star Tribune claims, that “the average American family spends thousands of dollars annually on junk fees,” all this bill means in practice is that they will now pay thousands of dollars annually in higher prices. “There’s no such thing as a free lunch,” as a great man once wrote, and the wave of a legislative wand won’t give you a cheaper one, either.