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The welfare costs of price controls and rent seeking in a class experiment

Published online by Cambridge University Press:  14 March 2025

Grace Finley ,
Charles Holt Open the ORCID record for Charles Holt [Opens in a new window]  and
Emily Snow
Grace Finley
Affiliation:
US Council of Economic Advisors, Washington, USA
Charles Holt*
Affiliation:
Department of Economics, University of Virginia, P.O Box 400182, Charlottesville, VA 22904-00182, USA
Emily Snow
Affiliation:
Boston Consulting Group, Boston, USA
*
[email protected]
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Abstract

There are two efficiency effects of price controls: an “output effect” measured by the standard welfare loss triangles, and an “imperfect selection effect” that arises when controls prevent price from excluding high-cost sellers or low-value buyers. Although not discussed in most textbooks, the imperfect selection effect can be as large as the standard Harberger triangle welfare loss in symmetric designs, as confirmed by a class experiment described in this paper. The experiment also permits an analysis of the ways random non-price allocations shift the relevant supply function, and the related effects of rent-seeking competition that can arise with price controls.

Keywords

Classroom experimentRent seekingPrice controlsMarket efficiencyVeconlab

JEL classification

C92: Laboratory, Group Behavior
Type
Original Paper
Information
Experimental Economics , Volume 22 , Issue 3: Special Issue in Honor of Charles R. Plott , September 2019 , pp. 753 - 771
Copyright
Copyright © 2018 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-018-9581-4) contains supplementary material, which is available to authorized users.

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Supplementary material: File

Finley et al. supplementary material

Online Appendix B: Instructions for a Hand-Run Pit Market with Price Controls
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Finley et al. supplementary material

Welfare Costs of Price Controls and Rent Seeking in a Class Experiment: Class Slides Appendix C
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