When Do Consumers Favor Price Increases: With Applications to Congestion and to Regulation

Abstract

For a conventional good, an increase in price reduces the consumer surplus of both those who no longer buy the good, and of those who continue to buy it. If, however, consumers must spend real resources to obtain rights for the good, or if the quality depends on the number of other consumers trying to obtain the same good, then a price increase may have different effects. Both these characteristics apply to congestible goods: a consumer’s utility decreases in the price he pays and in the number of other persons who use the good. Some users may gain from a price increase which reduces demand. Therefore, even if the revenue is not returned to the users, their welfare can increase.