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Price Controls and Consumer Surplus

  • Jeremy Bulow

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

  • Paul Klemperer

    ()

    (Nuffield College, University of Oxford, Oxford, UK)

The 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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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2009/w7/PCCS%2008.10.09.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2009-W07.

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Length: 11 pages
Date of creation: 01 Jul 2009
Date of revision:
Handle: RePEc:nuf:econwp:0907
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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  1. Edward L. Glaeser & Erzo F. P. Luttmer, 1997. "The Misallocation of Housing Under Rent Control," NBER Working Papers 6220, National Bureau of Economic Research, Inc.
  2. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  3. An, Mark Yuying, 1998. "Logconcavity versus Logconvexity: A Complete Characterization," Journal of Economic Theory, Elsevier, vol. 80(2), pages 350-369, June.
  4. Luttmer Erzo F.P., 2007. "Does the Minimum Wage Cause Inefficient Rationing?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-42, October.
  5. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  6. 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.
  7. 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.
  8. Palda, Filip, 2000. "Some deadweight losses from the minimum wage: the cases of full and partial compliance," Labour Economics, Elsevier, vol. 7(6), pages 751-783, November.
  9. R. Quentin Grafton & Michael B. Ward, 2008. "Prices versus Rationing: Marshallian Surplus and Mandatory Water Restrictions," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages S57-S65, 09.
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