Licensing Lawyers
i was just reading a paper by Winston and Crandall on lawyer licensing. Here’s how I would model it.
Without regulation, a person would need to spend, say, 1 year of his time to become a lawyers. With regulation, he needs to spend 3 years, and he needs to pay the market price for tuition, P. That market price is determined by the marginal cost of the education and by the number of law schools operating. There is free entry into the law school business, but initially there are few enough law schools that P exceeds MC. We can assume constant MC and that MC=AC. Denote the pre- and post-regulation quantities y Q_0 and Q_1. What happens?
A first loss is the extra cost: AC*Q_1 in education costs and 2Q_1w in the opportunity cost of lost pre-lawyer wages.
A second loss is the triangle loss from the reduction in the number of lawyers. This happens because the price of becoming a lawyer rises, partly because the cost rises, and partly because in the short run law schools can earn monopoly rents.
The immediate winners are incumbent lawyers.
New lawyers might or might not benefit, since their wages rise but their costs rise too (an important point to note: in the long run, even lawyers may be losing out because of licensing).
Existing law schools would also be immediate winners.
Then there would be expansion and entry of law schools. If MC is constant, then the law school rents will vanish in the long run. That does not mean the supply-side social costs fall, though. In fact, going from the short run to the long run, the quantity of lawyers will increase with the number of law schools, so AC*Q_2+ 2Q_2w > (AC+2w)Q_1. The demand-side social cost from the triangle loss will fall, though stil remaining positive.