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Regulated Prices, Rent-Seeking, and Consumer Surplus

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  • Jeremy Bulow

    ()
    (Graduate School of Business, Stanford University, USA)

  • Paul Klemperer

    ()
    (Nuffield College, Oxford University)

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., constantelasticity) 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 Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2012-W03.

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Length: 31 pages
Date of creation: 01 Mar 2012
Date of revision:
Handle: RePEc:nuf:econwp:1203

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Web page: http://www.nuff.ox.ac.uk/economics/

Related research

Keywords: Price Control; Rationing; Allocative Efficiency; Microeconomic Theory; Marginal Revenue; Minimum Wage; Rent Control; Consumer Welfare; Rent Seeking;

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  1. An, Mark Yuying, 1995. "Logconcavity versus Logconvexity: A Complete Characterization," Working Papers 95-03, Duke University, Department of Economics.
  2. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer, vol. 26(2), pages 445-469, 08.
  3. 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.
  4. Filip Palda, 2001. "Some Deadweight Losses from the Minimum Wage: The Cases of Full and Partial Compliance," Labor and Demography 0112001, EconWPA.
  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. 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.
  2. Tommy Andersson & Zaifu Yang & Dongmo Zhang, 2014. "How to Efficiently Allocate Houses under Price Controls?," Discussion Papers 14/05, Department of Economics, University of York.
  3. Zhu Wang & Julian Wright, 2012. "Ad-valorem platform fees and efficient price discrimination," Working Paper 12-08, Federal Reserve Bank of Richmond.
  4. 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.
  5. 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.
  6. Alexander Radygin & Revold Entov, 2014. "The Fundamental Privatization Theorem: Ideology, Evolution, Practice," Working Papers 0087, Gaidar Institute for Economic Policy, revised 2014.
  7. 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.
  8. David H. Autor & Christopher J. Palmer & Parag A. Pathak, 2012. "Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge Massachusetts," NBER Working Papers 18125, National Bureau of Economic Research, Inc.

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