Regulation and Excess Demand: A General-Equilibrium Approach

Abstract

In recent years several articles have appeared in this Journal and in others which attempt to assess the effects of price or quantity regulation by government agencies. MacAvoy' and Erickson and Spann2 have derived estimates of the cost of rate regulation by the Federal Power Commission. Everyone from Mayor Lindsay to the RAND Corporation has estimated the effects of rent control on the stock of housing in New York City. The wage-price freeze ordered by the president will surely give birth to numerous economic studies. The above-mentioned studies have been selected for illustration because each one is based on a common assertion: the regulation of prices will result in an excess demand or excess supply. The excessdemand assertion is based on the partial-equilibrium analysis of the effects of regulation, which is a useful analysis during periods when resources and their prices are fixed and unable to respond to the imposition of controls. However, from the long-run view, the analysis is incomplete. After a time, resources will move from one industry to another in response to regulation, so that it is incorrect to assume that excess demands or supplies will persist indefinitely.3 This paper contrasts the conclusions that can be drawn from a general-equilibrium analysis with those based on a partial-equilibrium analysis.