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

58 Pages Posted: 2 Jun 2008

See all articles by Lucas W. Davis

Lucas W. Davis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: May 2008

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.

Suggested Citation

Davis, Lucas W. and Kilian, Lutz, The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas (May 2008). NBER Working Paper No. w14030. Available at SSRN: https://ssrn.com/abstract=1139346

Lucas W. Davis (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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