The Effects of Reforming the Chinese Dual-Track Price System

The approach that we develop can be applied to any situation in which the
market is mixed with price regulation. This applies, in particular, to economies
that are still ‘socialist,’ or have not progressed far in the transition from socialism.
For example, Cuba has operated a ‘segmented’ market system for many years that
is similar to DTP, and in time of crisis it has increased the plan-track element
to try and protect the standard of living of the poor (Togores and Garcia, 2004).
The DTP model may also be seen as a natural way of modelling black markets
associated with rationing, and it may be adapted to any situation in which the
market is mixed with price regulation, including reform of the electricity market,
reform of the national health system, and of any market in which free and regulated
prices co-exist.

The rest of the paper is organized as follows. In Section 2 the basic model with
a homogeneous household is introduced. The weighted average price is defined and
the marginal effects on this average price and on the household’s welfare resulting
from changes in policy variables are derived. In Section 3 the model is extended
to cover two types of household and the possibility of resale of goods is allowed
for. A simple welfare analysis of the winners and losers from reform of DTP is
undertaken. Section 4 concludes, while proofs are given in an appendix.

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