WELFARE IMPLICATIONS OF PRICE REGULATION: A GENERAL EQUILIBRIUM ANALYSIS

This paper analyzes the welfare implications of price regulation in competitive market structures. The analysis is performed in a general equilibrium framework where individuals are producers of the goods they consume. These produced goods in the economy are designated as good A, good B, and q, which represents quality per unit of A. The first half of the paper is devoted to the competitive equilibrium and the effects of price regulation on product quality. The second half of the paper analyzes the welfare effects of price regulation when the economy consists of both non‐identical and identical consumers. It is shown that regulation may be a Pareto superior move in the absence of a market and price for quality.