Chaos and Misallocation under Price Controls

Price controls kill the incentive for arbitrage. We prove a Chaos Theorem: under a binding price ceiling, suppliers are indifferent across destinations, so arbitrarily small cost differences can determine the entire allocation. The economy tips to corner outcomes in which some markets are fully served while others are starved; small parameter changes flip the identity of the corners, generating discontinuous welfare jumps. These corner allocations create a distinct source of cross-market misallocation, separate from the aggregate quantity loss (the Harberger triangle) and from within-market misallocation emphasized in prior work. They also create an identification problem: welfare depends on demand far from the observed equilibrium. We derive sharp bounds on misallocation that require no parametric assumptions. In an efficient allocation, shadow prices are equalized across markets; combined with the adding-up constraint, this collapses the infinite-dimensional welfare problem to a one-dimensional search over a common shadow price, with extremal losses achieved by piecewise-linear demand schedules. Calibrating the bounds to station-level AAA survey data from the 1973-74 U.S. gasoline crisis, misallocation losses range from roughly 1 to 9 times the Harberger triangle.

Source: arXiv:2602.12066v1 - http://arxiv.org/abs/2602.12066v1 PDF: https://arxiv.org/pdf/2602.12066v1 Original Link: http://arxiv.org/abs/2602.12066v1