Thursday, August 9, 2012
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.