Publication Date


Series Number

92-WP 88


Under the current mixed system of planning and markets in the Chinese urban consumption sector, marginal decision rules in market economies are directly applicable. The demand functions in such mixed system involve not only market prices and income but also the state prices and quotas. Besides substitution and income effects, consumers respond to changes in the price of the commodity with government intervention as an implied income effect in the same way as they respond to changes in real income. Changes in the state price and/or state quota have no substitution effect. Consumers would perceive the changes as a result of anticipated income effect through their equivalent income variation. The policy implications involve the importance of not ignoring the free market in the state planning process. To monitor grain consumption, the government should increase the state grain prices and/or decrease the state grain quotas.