The Effects of Reforming the Chinese Dual-Track Price System

assumptions, relaxation of DTP leads to a fall in welfare for the former and a rise
in welfare for the latter.⁴

We also analyze the effects of the relaxation of DTP on the average price of
a good, i.e., on the weighted sum of the plan-track and the market price. But
although it is the average price that enters the calculation the CPI and inflation,
it is the marginal price faced by a household that is primarily what matters for
its behaviour, and so when we interpret inflation data, changes in the average
price will be less important if they result from changes in the plan-track price
and quantity than if they are due to changes in market variables. Indeed, since
the role of the plan track is primarily one of redistribution, the inflation resulting
from its reform does not necessarily lead to an increase in the market price. We
show that an increase in the plan-track price has a positive effect on the market
price but a negative effect on the average price, with the strength of these effects
depending on the elasticities of demand and supply of the good concerned. This
implies that government should be aware that a single policy change could result
in significantly different effects on the prices of different goods. We also show that
the effect on demand of a market price change is smaller under DTP, than under
a full market pricing.

⁴A related welfare discussion is found in Sah and Srinivasan (1988). They define government
intervention as a lump-sum procurement of DTP goods (agricultural products), which has no
effect on the market price. The effect of government policy on the welfare of rural households is
directly through the implied tax.

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