The Incidence of Price Changes in the U. S. Economy

Abstract

Both allocative and distributive effects occur whenever the price of a product is changed. If, for example, successful antitrust action against a cartel, legislative removal of an import duty or excise tax, or administrative deregulation of a product or service forces a reduction in the equilibrium price of a product to a competitive level, both a reallocation of resources and a redistribution of wealth will occur. The allocative effect, or change in the net benefit from producing and consuming the product or service, results from the increased production and consumption of units of output that cost less than the incremental value they create. The distributive effect, or transfer of benefits from producers (or government) to consumers, results from the lower expenditure paid by consumers, and, therefore, the lower revenue received by producers (or government) for the output that would have been sold at the higher price.