An Instructional Exercise in Price Controls: Product Quality, Misallocation, and Public Policy

Abstract

A price control policy has several potential effects upon market welfare. These include deadweight loss, surplus transfer from producer to consumer, misallocative cost, and quality degradation. The present article provides accessible pedagogical models with which to incorporate the former two issues into a welfare analysis of price control. The analysis allows students to form a more complete understanding of price control policies.

Rent control according to Seinfeld

“…Chang and Sanders (2010) and Weisman et al (2012) study the search costs associated with rent control within a probabilistic effort contest model. The authors find that, while presenting a substantial cost, a probabilistic search effort contest acts to reduce the misallocative cost of rent control (as in Landsburg, 2007 model of bribe payments).…”

“…The social costs of this misallocation are first order when the social costs from underprovision of housing are second order. Thus for a sufficiently marginal implementation of rent control, these costs will always be more important than the undersupply of housing (p. 2).Chang and Sanders (2010) and Weisman et al (2012) study the search costs associated with rent control within a probabilistic effort contest model. The authors find that, while presenting a substantial cost, a probabilistic search effort contest acts to reduce the misallocative cost of rent control (as in Landsburg, 2007 model of bribe payments).…”