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Price Controls and Consumer Surplus

Author

Listed:
  • Jeremy Bulow

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

  • Paul Klemperer

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

Abstract

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.

Suggested Citation

  • Jeremy Bulow & Paul Klemperer, 2009. "Price Controls and Consumer Surplus," Economics Papers 2009-W07, Economics Group, Nuffield College, University of Oxford.
    • Handle: RePEc:nuf:econwp:0907
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    References listed on IDEAS

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    5. Edward L. Glaeser & Erzo F. P. Luttmer, 2003. "The Misallocation of Housing Under Rent Control," American Economic Review, American Economic Association, vol. 93(4), pages 1027-1046, September.
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    7. 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 57-65, September.
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    Cited by:

    1. Simon Cowan, 2012. "Third-Degree Price Discrimination and Consumer Surplus," Journal of Industrial Economics, Wiley Blackwell, vol. 60(2), pages 333-345, June.

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    More about this item

    Keywords

    Rationing; Allocative Efficiency; Microeconomic Theory; Marginal Revenue; Minimum Wage; Rent Control; Consumer Welfare;
    All these keywords.

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D6 - Microeconomics - - Welfare Economics

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