Price Controls and Consumer Surplus

13 Pages Posted: 8 Sep 2009

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: August 2009

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.

Keywords: Allocative Efficiency, Consumer Welfare, marginal revenue, Microeconomic Theory, Minimum Wage, rationing, rent control

JEL Classification: D45, D6, D61

Suggested Citation

Bulow, Jeremy I. and Klemperer, Paul, Price Controls and Consumer Surplus (August 2009). CEPR Discussion Paper No. DP7412. Available at SSRN: https://ssrn.com/abstract=1469911

Jeremy I. Bulow

Stanford University ( email )

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Stanford, CA 94305-5015
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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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United Kingdom
+44 1865 278 588 (Phone)
+44 1865 278 557 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

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