Price Controls and Consumer Surplus

Abstract

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.Acknowledgments to be completed later