"Price Controls and Consumer Surplus"

Jeremy Bulow 
Graduate School of Business, Stanford University, Stanford, USA and

and

Paul Klemperer
Nuffield College, University of Oxford, Oxford OX1 1NF United Kingdom
	
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: Rationing, Allocative E¢ ciency, Microeconomic Theory, Mar-
ginal Revenue, Minimum Wage, Rent Control, Consumer Welfare

JEL Classification Numbers: D45 (Rationing), D61 (Allocative Ine¢ ciency), D6 (Welfare
Economics)