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The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas

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  • Lucas W. Davis
  • Lutz Kilian

Abstract

A direct consequence of imposing a ceiling on the price of a good for which secondary markets do not exist, is that, when there is excess demand, the good will not be allocated to the buyers who value it the most. The resulting allocative cost has been discussed in the literature as a potentially important component of the total welfare loss from price ceilings, but its practical importance has yet to be established empirically. In this paper, we address this question using data for the U.S. residential market for natural gas which was subject to price ceilings during 1954-1989. This market is well suited for such an empirical analysis and natural gas price ceilings affected millions of households. Using a household-level, discrete-continuous model of natural gas demand, we estimate that the allocative cost in the U.S. residential market for natural gas averaged $4.6 billion annually since the 1950s, effectively tripling previous estimates of the net welfare loss to U.S. consumers. We quantify the evolution of this allocative cost and its geographical distribution during the post-war period, and we highlight implications of our analysis for the regulation of other markets.

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  • Lucas W. Davis & Lutz Kilian, 2008. "The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas," NBER Working Papers 14030, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14030
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    Cited by:

    1. Paul J. Gertler & Orie Shelef & Catherine D. Wolfram & Alan Fuchs, 2016. "The Demand for Energy-Using Assets among the World's Rising Middle Classes," American Economic Review, American Economic Association, vol. 106(6), pages 1366-1401, June.
    2. Chan, H. Ron & Fell, Harrison & Lange, Ian & Li, Shanjun, 2017. "Efficiency and environmental impacts of electricity restructuring on coal-fired power plants," Journal of Environmental Economics and Management, Elsevier, vol. 81(C), pages 1-18.
    3. Alec Brandon & Paul J. Ferraro & John A. List & Robert D. Metcalfe & Michael K. Price & Florian Rundhammer, 2017. "Do The Effects of Social Nudges Persist? Theory and Evidence from 38 Natural Field Experiments," NBER Working Papers 23277, National Bureau of Economic Research, Inc.
    4. repec:eee:indorg:v:57:y:2018:i:c:p:35-83 is not listed on IDEAS
    5. Lucas W. Davis & Erich Muehlegger, 2010. "Do Americans consume too little natural gas? An empirical test of marginal cost pricing," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 791-810.
    6. Aart Gerritsen, 2016. "Equity and Efficiency in Rationed Labor Markets," Working Papers tax-mpg-rps-2016-04, Max Planck Institute for Tax Law and Public Finance.
    7. Chen Ling & David Scrogin, 2014. "Optimal pricing of public lotteries and comparison of competing mechanisms," Applied Economics, Taylor & Francis Journals, vol. 46(26), pages 3211-3223, September.
    8. Bulow, Jeremy I. & Klemperer, Paul, 2009. "Price Controls and Consumer Surplus," CEPR Discussion Papers 7412, C.E.P.R. Discussion Papers.
    9. Christiane Baumeister & Lutz Kilian & Xiaoqing Zhou, 2017. "Is the Discretionary Income Effect of Oil Price Shocks a Hoax?," Staff Working Papers 17-50, Bank of Canada.
    10. repec:eee:resene:v:52:y:2018:i:c:p:64-86 is not listed on IDEAS
    11. Alquist, Ron & Kilian, Lutz & Vigfusson, Robert J., 2013. "Forecasting the Price of Oil," Handbook of Economic Forecasting, Elsevier.
    12. Gerard, Francois, 2013. "What Changes Energy Consumption, and for How Long? New Evidence from the 2001 Brazilian Electricity Crisis," Discussion Papers dp-13-06, Resources For the Future.
    13. Porcher, Simon & Maziotis, Alexandros & Molinos-Senante, Maria, 2017. "The welfare costs of non-marginal water pricing: evidence from the water only companies in England and Wales," LSE Research Online Documents on Economics 82898, London School of Economics and Political Science, LSE Library.
    14. Levi Marks & Charles F. Mason & Kristina Mohlin & Matthew Zaragoza-Watkins, 2017. "Vertical Market Power in Interconnected Natural Gas and Electricity Markets," CESifo Working Paper Series 6687, CESifo Group Munich.
    15. Nancy L. Rose, 2014. "Learning from the Past: Insights for the Regulation of Economic Activity," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 1-23 National Bureau of Economic Research, Inc.
    16. Zhongmin Wang and Alan Krupnick, 2015. "A Retrospective Review of Shale Gas Development in the United States: What Led to the Boom?," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    17. Fotis, Panagiotis & Polemis, Michael, 2018. "The impact of market deregulation on milk price: A dynamic panel data approach," MPRA Paper 86542, University Library of Munich, Germany.
    18. repec:eee:pubeco:v:153:y:2017:i:c:p:56-68 is not listed on IDEAS
    19. Daire McCoy, John Curtis, 2017. "Exploring the spatial and temporal determinants of gas central heating adoption," GRI Working Papers 320, Grantham Research Institute on Climate Change and the Environment.
    20. Bennett, John & Chioveanu, Ioana, 2016. "Pro-Consumer Price Ceilings under Regulatory Uncertainty," MPRA Paper 72161, University Library of Munich, Germany.
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    More about this item

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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