Price Controls and Consumer Surplus
13 Pages Posted: 8 Sep 2009
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Price Controls and Consumer Surplus
Price Controls and Consumer Surplus
Date Written: August 2009
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 Classification: D45, D6, D61
Suggested Citation: Suggested Citation
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