The Effects of Reforming the Chinese Dual-Track Price System

whether it is possible for a household to trade the quantities bought on the plan
track (or, equivalently, the ‘coupons’ entitling purchase on the plan-track) does
not arise. The household’s problem is to solve

max U(x,

x,y

subject to px + y ≤  1            when x ≤ x;            (1)

px + У ≤  1 + (p — p)x  when x > x.

Here, if x ≤ xx, the marginal (and intra-marginal) price facing the household is px,
while full income is the same as in the absence of DTP. However, if x> xx the
marginal price facing the household is the market price p.Sincexx intra-marginal
units are obtained at the price px, full income must be adjusted to allow for the
implicit subsidy (p -px)xx that purchase at this lower price involves (see Dixon 1987;
Bennett and Dixon 1996). Hence, m =1+(p - px)xx, and the Marshallian demand
function becomes

x  =  x(px, 1)           when x ≤ xx;

x = x[p, 1+(p - px)xx] when x>xx.                 (2)

The arguments of the Marshallian demand function are the parameters of the

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