Price Controls and Consumer Surplus
AbstractThe condition for when a price control increases consumer welfare in perfect competition is tighter than often realised. When demand is linear, a small restriction on price only increases consumer surplus if the elasticity of demand exceeds the elasticity of supply; with log-linear or constant-elasticity, demand consumers are always hurt by price controls. The results are best understood - and can be related to monopoly-theory results - using the fact that consumer surplus equals the area between the demand curve and the industry marginal-revenue curve.
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Bibliographic InfoPaper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2009-W07.
Length: 11 pages
Date of creation: 01 Jul 2009
Date of revision:
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Web page: http://www.nuff.ox.ac.uk/economics/
Rationing; Allocative Efficiency; Microeconomic Theory; Marginal Revenue; Minimum Wage; Rent Control; Consumer Welfare;
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.
- Bulow, Jeremy & Klemperer, Paul, 2011. "Price Controls and Consumer Surplus," Research Papers 2086, Stanford University, Graduate School of Business.
- D45 - Microeconomics - - Market Structure and Pricing - - - Rationing; Licensing
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D6 - Microeconomics - - Welfare Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-11 (All new papers)
- NEP-COM-2009-12-11 (Industrial Competition)
- NEP-IND-2009-12-11 (Industrial Organization)
- NEP-MKT-2009-12-11 (Marketing)
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