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Regulated Prices, Rent Seeking, and Consumer Surplus

  • Jeremy Bulow
  • Paul Klemperer

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/pdfplus/10.1086/665416
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File URL: http://www.jstor.org/stable/full/10.1086/665416
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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
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  1. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  2. An, Mark Yuying, 1998. "Logconcavity versus Logconvexity: A Complete Characterization," Journal of Economic Theory, Elsevier, vol. 80(2), pages 350-369, June.
  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, June.
  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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