DP7412 Price Controls and Consumer Surplus

Author(s): Jeremy I. Bulow, Paul Klemperer
Publication Date: August 2009
Keyword(s): Allocative Efficiency, Consumer Welfare, marginal revenue, Microeconomic Theory, Minimum Wage, rationing, rent control
JEL(s): D45, D6, D61
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7412

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.