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Measuring the effects of price controls using mixed complementarity models

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  • Frederic Murphy
  • Axel Pierru
  • Yves Smeers

Abstract

Government involvement in managing domestic prices of energy and other commodities is a major issue in emerging economies. We examine one aspect of the problem, price controls, when governments set or cap prices. We show how a Mixed Complementarity Problem (MCP) formulation can be used to model and assess the impacts of price controls in multi-sector economic-equilibrium models. Both the gains from deregulation and the consequences of imposing new or altering existing regulations can thus be measured. We present three distinct models that capture different price-control situations: firms have to meet demand and receive an implicit subsidy, demand rationing occurs due to an associated price control constraint, and subsidies limit demand rationing. We present an approach to measuring the effects on the equilibrium in the first case and the levels of disequilibrium induced by price controls in the other cases. We also show how to determine the most efficient allocation program when a government engages in rationing. We illustrate the cases described by these models using markets that have or had price controls.
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Suggested Citation

  • Frederic Murphy & Axel Pierru & Yves Smeers, 2019. "Measuring the effects of price controls using mixed complementarity models," LIDAM Reprints CORE 2997, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:2997
    Note: In : European Journal of Operational Research, 275, 666-676, 2019
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    Cited by:

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    2. Durand-Lasserve, Olivier & Almutairi, Hossa & Aljarboua, Abdullah & Pierru, Axel & Pradhan, Shreekar & Murphy, Frederic, 2023. "Hard-linking a top-down economic model with a bottom-up energy system for an oil-exporting country with price controls," Energy, Elsevier, vol. 266(C).
    3. Gong, Chengzhu & Wu, Desheng & Gong, Nianjiao & Qi, Rui, 2020. "Multi-agent mixed complementary simulation of natural gas upstream market liberalization in China," Energy, Elsevier, vol. 200(C).
    4. Karanfil, Fatih & Pierru, Axel, 2021. "The opportunity cost of domestic oil consumption for an oil exporter: Illustration for Saudi Arabia," Energy Economics, Elsevier, vol. 96(C).
    5. Rioux, Bertrand & Shabaneh, Rami & Griffiths, Steven, 2021. "An economic analysis of gas pipeline trade cooperation in the GCC," Energy Policy, Elsevier, vol. 157(C).
    6. Rioux, Bertrand & Galkin, Philipp & Murphy, Frederic & Feijoo, Felipe & Pierru, Axel & Malov, Artem & Li, Yan & Wu, Kang, 2019. "The economic impact of price controls on China's natural gas supply chain," Energy Economics, Elsevier, vol. 80(C), pages 394-410.
    7. Vietha Devia SS, 2019. "Analysis of Crude Oil Price and Exchange Rate Volatility on Macroeconomic Variables (Case Study of Indonesia as Emerging Economic Country)," International Journal of Business and Administrative Studies, Professor Dr. Bahaudin G. Mujtaba, vol. 5(5), pages 257-271.
    8. Muñoz, Juan C. & Sauma, Enzo & Muñoz, Francisco D. & Moreno, Rodrigo, 2023. "Analysis of generation investments under price controls in cross-border trade of electricity," Energy Economics, Elsevier, vol. 123(C).
    9. Wogan, David & Murphy, Frederic & Pierru, Axel, 2019. "The costs and gains of policy options for coordinating electricity generation in the Gulf Cooperation Council," Energy Policy, Elsevier, vol. 127(C), pages 452-463.
    10. Guenette,Justin Damien, 2020. "Price Controls : Good Intentions, Bad Outcomes," Policy Research Working Paper Series 9212, The World Bank.
    11. Gauthier de Maere d’Aertrycke & Yves Smeers & Hugues de Peufeilhoux & Pierre-Laurent Lucille, 2020. "The Role of Electrification in the Decarbonization of Central-Western Europe," Energies, MDPI, vol. 13(18), pages 1-20, September.

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