Regulated Prices, Rent-Seeking, and Consumer Surplus

31 Pages Posted: 12 Mar 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)

Date Written: February 27, 2012

Abstract

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

Bulow, Jeremy I. and Klemperer, Paul, Regulated Prices, Rent-Seeking, and Consumer Surplus (February 27, 2012). Journal of Political Economy, 2012. Available at SSRN: https://ssrn.com/abstract=2011903

Jeremy I. Bulow

Stanford University ( email )

Room L 237
Stanford, CA 94305-5015
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650-723-2160 (Phone)
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Paul Klemperer (Contact Author)

University of Oxford - Department of Economics ( email )

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Oxford, OX1 3BJ
United Kingdom
+44 1865 278 588 (Phone)
+44 1865 278 557 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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