124 JOURNAL OF POLITICAL ECONOMY Quantity FIG1.-Efficient rationed demand and efficient planned supply allocated to users with the highest willingness to pay(efficient ra- tioning) or that the planned supply is delivered by suppliers with the lowest marginal costs(efficient planned supply). In what follows, we denote by PM and P(respectively, Qand Q)market equilib- rium prices(quantities)under limited and full market liberalization We use Q to denote plan quantity and PP (i= 1, 2)to denote poss ble plan prices, with Pi below P and P? above PE A. The Plan Quantity Is Less than the Fully Liberalized Market Equilibrium Quantity We begin with the special case of efficient rationing and efficient planned supply Rationed demand and planned supply are therefore the top and bottom segments of the willingness to pay curve and the marginal cost curve, respectively(see fig. 1). Under the assump- tion of atomistic profit and utility maximization, the willingness to pay and marginal cost curves turn out to be precisely the market supply and demand curves. Dual-track liberalization means that Q continues to be delivered at plan price Pi but that any additional quantity can be sold freely in the market. The market track will thus provide an additional supply QE-Q at price PE. The allocative outcome under dual-track liberalization is just as efficient as that under single-track liberalization. The difference between the two is entirely distributional
REFORM WITHOUT LOSERS Suppose first that the plan price is Pi, below P: Under the plan the rationed users have a surplus given by the area bounded by ABCG; the planned suppliers have a planned profit/loss equal to area GCDF. With the dual track, the surpluses of the rationed users and the planned suppliers remain exactly the same, by design. Com- pared to the outcome of the single-track liberalization, there is an implicit lump-sum transfer equal to(Pt- PnQ from the planned suppliers to the rationed users so that the latter and the former are both no worse off than before. However, the new users and suppli- BED. The analysis is similar if the plan price is P?, above PE. Note that in this special case of efficient rationing and efficient planned supply the introduction of the market track achieves effi- ciency even under limited market liberalization. The reason is that the most deserving users and the most efficient suppliers are already under the plan track, and they would have been the first users and suppliers in a fully liberalized market in any case ye next consider the general case in which Q is not necessarily located to users with the highest willingness to pay and some the planned suppliers may have higher marginal costs than other potential suppliers In figure 2, we represent the willingness to pay curve of the rationed users by a generic curve AH and the marginal cost curve of the planned supply by a generic curve Fl In contrast to the special case above, the allocative outcome now depends on whether there is limited or full liberalization of the mar- ket track. Under limited liberalization, the plan track and the market track are completely segregated; therefore, in our partial equilib- rium framework the market track consists of only the residual demand and supply, that is, total demand and supply reduced, re spectively, by the rationed demand and planned supply. Their inter- section represents the limited market liberalization equilibrium While under limited liberalization the dual-track approach is Pareto- improving, it cannot in general achieve efficiency because one can- not rule out the possibility that a rationed user may have ness to pay below PE, or a planned supplier may have its marginal cost above P. In fact, the following proposition shows that limited liberalization of the market track always leads to inefficiency in the form of overproduction relative to the fully liberalized market equi- libri Note that in a general equilibrium framework, an equilib der a fully liber lized dual-track approach is generally not the proach because of differences in the distribution of income(see Lau et al. 1997) ever, efficiency holds in either case
JOURNAL OF POLITICAL ECONOMY 是 Residual Sup quantity is less than the fully liberalized market equilibrium quay. ply:Planned FIG. 2.-Inefficient rationed demand and inefficient planned PROPOSITION 1. If the plan quantity is less than the fully liberalized market equilibrium quantity, then(1)the combined output of the ks under limited liberalization of th rium quantity, and (2) the market equilibrium price under limited liberalization is greater(less) than or equal to the market equilib- rium price under full liberalization of the market track if planned supply (rationed demand) is efficient Proof. If PM s PE, then every potential user with a willingness to pay greater than or equal to P will be an actual user; moreover since rationing is not necessarily efficient, there may also be actual users of planned supplies whose willingness to pay is below PE. Thus total actual demand, Q+Q, must be greater than or equal to Q If Pm 2 P, then every potential supplier with a marginal cost less than or equal to Pl will be an actual supplier; moreover, since supply planning is not necessarily efficient, there may also be one or more actual suppliers whose marginal costs are above PE. Thus total actual supply, Q+ Q, must also be greater than or equal to QE If there is efficient planned supply, the residual supply curve is the top segment of the total supply curve. Since the total supply curve is monotonically increasing, Q+QM2Q implies that PM 2 P. Similarly, if there is efficient rationing the residual de- mand curve is the bottom segment of the total demand curve. Since
REFORM WITHOUT LOSERS the total demand curve is monotonically decreasing, Q+Q 2Q implies PM s PE Q.E.D We now analyze full liberalization of the market track. Rationed users are now allowed to resell rationed goods in the market as long as Q is delivered to and accepted by them at plan price Pr. Similarly, planned suppliers are allowed to purchase the goods in the market to fulfill their delivery obligations at plan price Pr instead of produc ing the goods themselves. Thus the market consists of the total de- mand and supply Suppose that the plan price Pl is below PE. Under the plan, the rationed users have a surplus given by the area under the rationed demand curve AH less the rectangle Pi e planned suppliers have a planned profit/ loss equal to the difference between Pr Q and the area under the planned supply curve Fl Compared to the outcome of the single-track liberalization, the dual-track liberaliza- tion entails an implicit lump-sum transfer equal to the rectangle Ph.Q from the planned suppliers to the rationed users. As a result, a rationed user whose willingness to pay is greater than or equal to P and a planned supplier whose marginal cost is less than or equal to P will have their prereform rents unchanged. A rationed user whose willingness to pay is less than P will still accept delivery from planned suppliers at the plan price but will resell the plan- allocated inputs on the market at price P, thereby obtaining a sur plus equal to Pe- Pr. This corresponds to the common practice of resale"of rationed goods. A planned supplier whose marginal cost is above P will still deliver to its rationed users their plan-mandated supplies at the plan price, but instead of producing them, he will try to purchase them on the market at price P for redelivese thereby limiting his loss to only PE- Pr. This corresponds to common practice of" subcontractingby inefficient planned suppli- ers to more efficient suppliers. Clearly, the rationed users and the planned suppliers are no worse off than before; and at least some of them are even better off. Thus Pareto improvement and efficien are simultaneously attained A similar argument can be made for P? above P, as, for example in the context of a labor market. Under the dual-track approach an enterprise whose marginal product of labor exceeds or equals P will also have its prereform rents unchanged. An enterprise whose marginal product of labor is below PE will still pay the plan wage but will"resell", its labor on the market for p, thereby limiting its loss to the difference between P? and PE. This corresponds to the com- mon practice of "labor reallocation. Reallocated workers preserve their preexisting rents because they continue to receive a total com- pensation equal to the plan rather than the market wage rate. Simi-