The Effects of Reforming the Chinese Dual-Track Price System

When the resale market is available, the two types of household face the CPI
above. Compared to Eq. (6), the CPI is reduced when resale is possible, as α<1.
When the proportion α =1, and the two models become the same.

Proposition 5 Assuming that x,^l_m ≤ x2_m and x^s — αx ≥ 0, with resale, transitional
policy increases the CPI, i.e., dp > 0 > ^dp.

We conclude that with or without the possibility of resale, transitional policy
conditionally deflates the market price while inflating the CPI of DTP goods.

3.2 Winners and Losers

With the two types of household and resale, the indirect utility functions are

v¹ = v[p, y¹ + (p — p)x];

v² = v(p,y²}.

Using these functions, we obtain our last proposition.

Proposition 6 When resale is possible, transitional policy reduces the welfare of a
type-1 household, i.e., dp < 0 < dv^- ; but it raises the welfare of a type-2 household,
i.e.,^dv2 > 0 > d^v2.

d dp            dx

Irrespective of whether resale is possible, transitional policy reduces the im-
plicit subsidy component of the type-1 household’s full income and therefore re-
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