Journal of Political Economy Vol. 86 No. 2 1978
Price Controls, Binding Constraints, and Intertemporal Economic Decision Making
Abstract
A constraint on a decision variable is normally thought to be binding only if it prevents that variable from taking on its unrestricted current equilibrium value. This paper establishes that this is not true when decisions are intertemporally related. In such a decision-making environment, imposing a price ceiling, for example, which is greater than the current equilibrium price can be binding in that it will alter current price. Likewise, the removal of a price ceiling which exceeds current price can result in a change in that price. Among other things, this result casts doubt on the widespread view that price ceilings on petroleum products are not binding because current prices are less than the ceilings.
- Volume
- 86
- Issue
- 2
- Pages
- 293-301
- Sources
- bibtex:phds-export.bib