Price Controls and Consumer Surplus
AbstractPrice controls lead to misallocation of goods and encourage rent-seeking. The misallocation effect alone is enough to ensure that consumer surplus is always reduced by a price control in an otherwise-competitive market with convex demand if supply is more elastic than demand; or when demand is log-convex (e.g., constant-elasticity) even if supply is inelastic. The same results apply both when rationed goods are allocated by costless lottery among interested consumers, and when costly rent-seeking and/or partial de-control mitigates the allocative inefficiency. The results are best understood using the fact that in any market, consumer surplus equals the area between the demand curve and the industry marginal revenue curve.
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Bibliographic InfoPaper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2086.
Date of creation: Oct 2011
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Other versions of this item:
- Bulow, Jeremy I. & Klemperer, Paul, 2009. "Price Controls and Consumer Surplus," CEPR Discussion Papers 7412, C.E.P.R. Discussion Papers.
- Paul Klemperer & Jeremy Bulow, 2009. "Price Controls and Consumer Surplus," Economics Series Working Papers 2009-W07, University of Oxford, Department of Economics.
- Jeremy Bulow & Paul Klemperer, 2009. "Price Controls and Consumer Surplus," Economics Papers 2009-W07, Economics Group, Nuffield College, University of Oxford.
- D45 - Microeconomics - - Market Structure and Pricing - - - Rationing; Licensing
- D60 - Microeconomics - - Welfare Economics - - - General
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-21 (All new papers)
- NEP-COM-2011-11-21 (Industrial Competition)
- NEP-IND-2011-11-21 (Industrial Organization)
- NEP-MIC-2011-11-21 (Microeconomics)
- NEP-REG-2011-11-21 (Regulation)
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