The Effects of Reforming the Chinese Dual-Track Price System

measuring household welfare.

First, consider of the representative household model. Corresponding to U (x, y),
given that x > x, the indirect utility function for the representative household is

v = v[p, 1 + (p — p)x].

Proposition 3 Transitional policy changes decrease the welfare of the represen-

tative household , i.e., ^dv < 0 < d^v.
d d dp            dx

Thus, household indirect utility is reduced by the reforms of raising p and
lowering x, despite the increase that may occur in the average price. However, this
result would not necessarily arise if we were also to consider the general equilibrium
ramifications. Reform will increase the profits of the SOEs: the change in profits of
the SOEs is exactly equivalent to the change in the implicit subsidy (p—p))x) induced
by the reforms. Since the DTP is in effect a lump-sum transfer from the producer
to the consumer, reform merely serves to redistribute away from the consumer to
the producer. In this case, a household covered by the DTP system would be a
loser from the full liberalization of prices. However, in a capitalist economy the
profits of the firm find their way into the household’s budget constraint and so such
reforms would not reduce welfare. This implies that when resale is not possible,
or is limited, convergence of the plan track price to the higher, market price level
is damaging for households, though state collects more profits from SOEs.

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