Price Controls and Consumer Surplus
27 Pages Posted: 17 Aug 2009 Last revised: 27 Feb 2012
Date Written: October 2011
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: Suggested Citation