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Regulated Prices, Rent Seeking, and Consumer Surplus

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  • Jeremy Bulow
  • Paul Klemperer

Abstract

Price 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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File URL: http://www.jstor.org/stable/full/10.1086/665416
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Bibliographic Info

Article 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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Handle: RePEc:ucp:jpolec:doi:10.1086/665416

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  1. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer, vol. 26(2), pages 445-469, 08.
  2. An, Mark Yuying, 1998. "Logconcavity versus Logconvexity: A Complete Characterization," Journal of Economic Theory, Elsevier, vol. 80(2), pages 350-369, June.
  3. Palda, Filip, 2000. "Some deadweight losses from the minimum wage: the cases of full and partial compliance," Labour Economics, Elsevier, vol. 7(6), pages 751-783, November.
  4. W. Kip Viscusi & Joseph E. Harrington & John M. Vernon, 2005. "Economics of Regulation and Antitrust, 4th Edition," MIT Press Books, The MIT Press, edition 4, volume 1, number 026222075x, December.
  5. Welch, Finis, 1974. "Minimum Wage Legislation in the United States," Economic Inquiry, Western Economic Association International, vol. 12(3), pages 285-318, September.
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Cited by:
  1. Andersson , Tommy & Yang , Zaifu & Zhang , Dongmo, 2014. "How to Efficiently Allocate Houses under Price Controls?," Working Papers 2014:24, Lund University, Department of Economics.
  2. Xavier Gabaix & David Laibson & Deyuan Li & Hongyi Li & Sidney Resnick & Casper G. de Vries, 2013. "The Impact of Competition on Prices with Numerous Firms," Working Papers 13-07, Chapman University, Economic Science Institute.
  3. Peter Neary & Monika Mrazova, 2013. "Not so demanding: Preference structure, firm behavior, and welfare," Economics Series Working Papers 691, University of Oxford, Department of Economics.
  4. Alexander Radygin & Revold Entov, 2014. "The Fundamental Privatization Theorem: Ideology, Evolution, Practice," Working Papers 0087, Gaidar Institute for Economic Policy, revised 2014.
  5. Zhu Wang & Julian Wright, 2012. "Ad-valorem platform fees and efficient price discrimination," Working Paper 12-08, Federal Reserve Bank of Richmond.
  6. David H. Autor & Christopher J. Palmer & Parag A. Pathak, 2014. "Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 661 - 717.
  7. Aguirre Pérez, Iñaki & Cowan, Simon George, 2013. "Monopoly price discrimination with constant elasticity demand," IKERLANAK Ikerlanak;2013-74, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
  8. David Scrogin & Chen Ling, 2012. "Optimal Pricing of Public Lotteries and Comparison of Competing Mechanisms," Working Papers 2012-05, University of Central Florida, Department of Economics.

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