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Regulated Prices, Rent-Seeking, and Consumer Surplus

  • Jeremy Bulow

    ()

    (Graduate School of Business, Stanford University, USA)

  • Paul Klemperer

    ()

    (Nuffield College, Oxford University)

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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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2012/bkfinal.pdf
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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
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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  1. Welch, Finis, 1974. "Minimum Wage Legislation in the United States," Economic Inquiry, Western Economic Association International, vol. 12(3), pages 285-318, September.
  2. An, Mark Yuying, 1995. "Logconcavity versus Logconvexity: A Complete Characterization," Working Papers 95-03, Duke University, Department of Economics.
  3. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  4. Filip Palda, 2001. "Some Deadweight Losses from the Minimum Wage: The Cases of Full and Partial Compliance," Labor and Demography 0112001, EconWPA.
  5. 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.
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