Regulated Prices, Rent Seeking, and Consumer Surplus
AbstractPrice controls lead to misallocation of goods and encourage rent seeking. The misallocation effect alone ensures that a price control always reduces consumer surplus in an otherwise-competitive market with convex demand if supply is more elastic than demand or with log-convex demand (e.g., constant elasticity) even if supply is inelastic. The same results apply whether rationed goods are allocated by costless lottery or whether costly rent seeking and/or partial decontrol mitigates the inefficiency. Our analysis exploits the observation that in any market, consumer surplus equals the area between the demand curve and the industry marginal revenue curve.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Political Economy.
Volume (Year): 120 (2012)
Issue (Month): 1 ()
Pages: 160 - 186
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Web page: http://www.journals.uchicago.edu/JPE/
Other versions of this item:
- Jeremy Bulow & Paul Klemperer, 2012. "Regulated Prices, Rent-Seeking, and Consumer Surplus," Economics Papers 2012-W03, Economics Group, Nuffield College, University of Oxford.
- D45 - Microeconomics - - Market Structure and Pricing - - - Rationing; Licensing
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D6 - Microeconomics - - Welfare Economics
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