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

Lucas W. Davis, Lutz Kilian

NBER Working Paper No. 14030
Issued in May 2008
NBER Program(s):Environment and Energy Economics

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. This market is well suited for such an empirical analysis and natural gas price ceilings affected millions of households. Using a household-level, discrete-continuous model of natural gas demand, we estimate that the allocative cost in the U.S. residential market for natural gas averaged $4.6 billion annually since the 1950s, effectively 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.

download in pdf format
   (695 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14030

Published: Journal of Political Economy, 2011, 119(2), 212-241. citation courtesy of

Users who downloaded this paper also downloaded* these:
Davis and Muehlegger w15885 Do Americans Consume Too Little Natural Gas? An Empirical Test of Marginal Cost Pricing
Borenstein and Davis w16653 The Equity and Efficiency of Two-Part Tariffs in U.S. Natural Gas Markets
Davis and Kilian w14685 Estimating the Effect of a Gasoline Tax on Carbon Emissions
Hubbard and Weiner w3502 Efficient Contracting and Market Power: Evidence from the U.S. Natural Gas Industry
Campbell and Cochrane w4995 By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us