Price Controls and Consumer Surplus

27 Pages Posted: 17 Aug 2009 Last revised: 27 Feb 2012

See all articles by Jeremy Bulow

Jeremy Bulow

Stanford University; National Bureau of Economic Research (NBER)

Paul Klemperer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2011

Abstract

Price controls lead to misallocation of goods and encourage rent-seeking. The misallocation effect alone is enough to ensure that consumer surplus is always reduced by a price control in an otherwise-competitive market with convex demand if supply is more elastic than demand; or when demand is log-convex (e.g., constant-elasticity) even if supply is inelastic. The same results apply both when rationed goods are allocated by costless lottery among interested consumers, and when costly rent-seeking and/or partial de-control mitigates the allocative inefficiency. The results are best understood using the fact that in *any* market, consumer surplus equals the area between the demand curve and the industry marginal revenue curve.

Keywords: Price Controls, Consumer Surplus, Rationing, Marginal Revenue, Minimum Wage, Rent Control

JEL Classification: D45, D61, D6

Suggested Citation

Bulow, Jeremy I. and Klemperer, Paul, Price Controls and Consumer Surplus (October 2011). Available at SSRN: https://ssrn.com/abstract=1439045 or http://dx.doi.org/10.2139/ssrn.1439045

Jeremy I. Bulow

Stanford University ( email )

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National Bureau of Economic Research (NBER)

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Paul Klemperer (Contact Author)

University of Oxford - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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