Price Controls and Consumer Surplus

Posted by D. Daniel Sokol

Jeremy Bulow (Graduate School of Business, Stanford University) and Paul Klemperer (Nuffield College, University of Oxford, Oxford, UK) analyze 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.