“Junk Fees” Typically Serve an Important Purpose

Charging extra for specific preferences, such as a seat selection on a flight, enables lower basic prices, increasing access to no-frills options for lower-income customers, while allowing businesses to customize their services to individual customers’ preferences. Airlines unbundle in-flight food and checked bags, for example, leading to more profit opportunities and lower base fares. Yes, “price discrimination”—charging various customers different amounts for the same product—can sometimes be harmful to customers on net. But banning such unbundling when consumers put wildly different values on certain services can price out poorer consumers and compel others to pay for services they neither want nor need.

Likewise, overdraft fees from banks help disincentivize costly behavior. Banks incur costs and face heightened risks when customers overdraw their accounts. Overdraft charges help deter this behavior in a well-targeted way, by imposing charges on those customers whose accounts become overdrawn. Capping or constraining overdraft fees doesn’t eliminate these costs and risks; it just means someone else must be charged for them in a different way. Banning overdraft charges thus means higher prices for some other subset of a bank’s customers.

This is from Ryan Bourne, “Abolishing ‘Junk’ Fees Would Be Junk Policy,” in Ryan A. Bourne, The War on Prices: How Popular Misconceptions About Inflation, Value, and Prices Create Bad Policy, which was released this week. There’s actually some other content between these two paragraphs.

As I said in the blurb on the book this is one of my favorite chapters. Specifically, I wrote, “Particularly good are the chapters on rent controls, price controls on oil and natural gas, and so-called junk fees, which are really fees to solve problems that would exist without them.”

Bourne quotes President Biden’s attack on “junk fees.” I get the impression, given Joe Biden’s low or close to zero understanding of economics, that Biden thinks that eliminating junk fees won’t cause any prices to rise.