Template-type: ReDIF-Paper 1.0
Author-Name: Jeremy Bulow
Author-Email: jbulow@stanford.edu
Author-Workplace-Name: Graduate School of Business, Stanford University, USA
Author-Name: Paul Klemperer
Author-Email: paul.klemperer@economics.ox.ac.uk
Author-Workplace-Name: Nuffield College, Oxford University
Title: Regulated Prices, Rent-Seeking, and Consumer Surplus
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., constantelasticity)
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
Classification-JEL: D45 (Rationing), D61 (Allocative Inefficiency), D6 (Welfare Economics)
Length: 31 pages
Creation-Date: 2012-03-01
Number: 2012-W03
File-URL: http://www.nuffield.ox.ac.uk/economics/papers/2012/bkfinal.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1203