The Effects of Reforming the Chinese Dual-Track Price System

Proposition 4 Assume that xm ≤ χ^,2_m and x^s — αx ≥ 0. With resale, transitional
policy reduces the market price, i.e. ^dp < 0 < dχ.

Thus, we have found that the effect of transitional policy on market equilib-
rium price is negative, with or without the opportunity for resale of the rationed
quantity.

The next question is, what do we mean by the CPI now? In effect, each type of
household faces a different average price, since the mix of market- and plan-track
differs between them. The type-1 household faces an average price (x'_x^- x) P + χ^χ1 )

while the type-2 household faces an average price that is the same as the market
price, p. Since the type-1 household buys the proportion ^xχ¹ of the total goods
supply, where x denotes total demand for good X , while the type-2 household
buys the proportion ^xχ², the CPI can be written,

x ^χ1 Γ ∕^{χl - χ}λ , ^χ _] , xx     x2

P = α—  ---— p + —p +(1 — α) —p

11
xx   x    x

where ^x is the ratio of goods allocated through the plan-track to the total supply,
which is multiplied by the proportion of the population that is officially covered
by the plan-track system, to obtain the proportion α∣ of DTP goods. Given (12),
(16) simplifies to,

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