Regulated Prices, Rent-Seeking, and Consumer Surplus
31 Pages Posted: 12 Mar 2012
Date Written: February 27, 2012
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., constant-elasticity) 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.
Keywords: Price Control, Rationing, Allocative Efficiency, Microeconomic Theory, Marginal Revenue, Minimum Wage, Rent Control, Consumer Welfare, Rent Seeking
JEL Classification: D45, D61, D6
Suggested Citation: Suggested Citation