August 9, 2012
Regulated Prices, Rent-Seeking, and Consumer Surplus
Posted by D. Daniel Sokol
Jeremy Bulow (Graduate School of Business, Stanford University, USA) and Paul Klemperer (Nuffield College, Oxford University) discuss 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.
August 9, 2012 | Permalink
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