Discussion paper

DP7412 Price Controls and Consumer Surplus

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.

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Citation

Bulow, J and P Klemperer (eds) (2009), “DP7412 Price Controls and Consumer Surplus”, CEPR Press Discussion Paper No. 7412. https://cepr.org/publications/dp7412