Working Paper: CEPR ID: DP7412
Authors: Jeremy I. Bulow; Paul Klemperer
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.
Keywords: Allocative efficiency; Consumer welfare; Marginal revenue; Microeconomic theory; Minimum wage; Rationing; Rent control
JEL Codes: D45; D6; D61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elasticity of demand (D12) | consumer surplus (D46) |
| price controls (E64) | consumer surplus (D46) |
| inelastic supply (Q31) | consumer surplus (D46) |
| rationing (D45) | consumer surplus (D46) |