The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas
Lucas W. Davis and Lutz Kilian
Journal of Political Economy, 2011, 119(2), 212-241.
Reprinted in "The Causes and Consequences of Deregulation", MacAvoy and Schmalensee eds., Edward Elgar, 2014.
NBER Working Paper
Blog Post ("Natural Gas Shortages in Mexico")
A direct consequence of imposing a ceiling on the price of a good for which secondary
markets do not exist, is that, when there is excess demand, the good will not be allocated
to the buyers who value it the most. The resulting allocative cost has been discussed in the
literature as a potentially important component of the total welfare loss from price ceilings, but
its practical importance has yet to be established empirically. In this paper, we address this
question using data for the U.S. residential market for natural gas which was subject to price ceilings during 1954-1989 and is well suited for such an empirical analysis. Using a householdlevel,
discrete-continuous model of natural gas demand, we estimate that the allocative cost
in the U.S. residential market for natural gas averaged $3.6 billion annually, nearly tripling
previous estimates of the net welfare loss to U.S. consumers. We quantify the evolution of this
allocative cost and its geographical distribution during the post-war period, and we highlight
implications of our analysis for the regulation of other markets.