The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas

Abstract

A direct consequence of restricting the price of a good for which secondary markets do not exist is that, in the presence of excess demand, the good will not be allocated to the buyers who value it the most. We demonstrate the empirical importance of this allocative cost for the U.S. residential market for natural gas, which was subject to price ceilings during 1954–89. Using a household-level, discrete-continuous model of natural gas demand, we estimate that the allocative cost in this market averaged $3.6 billion annually, nearly tripling previous estimates of the net welfare loss to U.S. consumers.