Friday, December 11, 2009
Posted by D. Daniel Sokol
Jeremy Bulow (Stanford - Graduate School of Business) and Paul Klemperer (Oxford - Econ) p
Jeremy Bulow (Stanford - Graduate School of Business) and Paul Klemperer (Oxford - Econ) provide thoughts on Price Controls and Consumer Surplus.
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.