Utility Maximization and Dissipation Under Price Controls

Abstract

This paper shows how basic micro-economics tools, and more specifically utility analysis, can be used to understand dissipating behavior in situations where prices alone cannot equate supply and demand. A few conclusions can be derived from our analysis: 1) the amount of dissipation depends on how clearly rights to buy are defined, 2) there is a crucial difference when analyzing non-price competition between average non-price costs and marginal non-price costs ; 3) When net suppliers do not have to compete on non-price margins, the cost of dissipation is fully borne by net demanders and net-demanders may sometimes gain by forcing net-suppliers to compete on non-priced margins ; 4) individuals have an incentive to minimize dissipation. If bargaining costs are zero, it will always be rational to establish institutions to get rid of wasteful non-price competition.

Keywords: Price controls, dissipation, rent-seeking

JEL Classification: G18, P14