PRICE CEILINGS AND PARTY PRIVILEGE

I. INTRODUCTION Price ceilings in practice are often quite different from the standard textbook version. This paper analyzes price ceilings in Communist countries. They are characterized by the existence of a privileged group, namely members of the Communist Party. Price ceilings in many less developed countries are similar to those in Communist countries. II. THE NON-DISCRIMINATORY PRICE CEILING There are two groups of consumers, members of the Communist Party and Others. Figure 1 shows MARKET DEMAND and the demand of Party members, PARTY DEMAND. In equilibrium the price is $4 and 24 units are produced. Party members consume 9 units and Others consume 15 units. Then the government imposes a price ceiling of $3, as shown. Because of the ceiling, only 16 units are supplied. Consumers compete for these 16 units until the cost per unit to consumers is equal to the demand price of $6. The ticket price on the item is still the official price ceiling and that is the price the suppliers receive, but demanders pay the ticket price, $3 per unit, plus the cost of the time spent waiting in line, which is equivalent to another $3 per unit. The price ceiling is inefficient. The Dead Weight Loss is area C plus D plus E. Area C, or $21 ($3 x 7), is the Transaction Cost imposed on Party members. It is the value of the time Party members spend waiting in line. Area D, or $27 ($3 x 9), is the Transaction Cost imposed on Others. It is the value of the time Others spend waiting in line. The combined Transaction Cost is C plus D, or $48 ($3 x 16). Area E is the production cost of the ceiling. It arises from the fact that the quantity produced declines from 24 to 16. The Consumers' Surplus of Party members is area A and the Consumers' Surplus of Others is B. The Producers' Surplus is the hatched area. The price ceiling makes the consumer surpluses and the producer surplus smaller; it makes everybody worse off. III. THE DISCRIMINATORY PRICE CEILING Price ceilings create shortages. Because consumers are not able to buy as much as they would like at the posted price, there is need for a mechanism to control who may buy and how much each may buy. The scheme we just considered implicitly assumed that rationing was on a "First come, first serve" basis. In fact, the rationing scheme used in Communist countries (and in many Third World countries) is more complicated--and more efficient--than that. Recall that the scheme discussed above resulted in waiting lines and imposed additional buying costs of $3 per unit on all consumers. We know from Figure 1 that 16 units are offered for sale. In Communist countries those 16 units are allocated this way: The store shelves are stocked with the 16 units and Party members are allowed into the stores first and can buy as many units as they want at the official price of $3. When the Party members are done the Others are allowed in and must compete for the units that are left. Panel 1 of Figure 2 shows the demand curve of Party members, PARTY DEMAND. At the official price of $3, Party members choose to buy 10 units. Party members don't have to wait in lines; they incur no Transaction Cost at all. For Party members, the price is lower and the Consumers' Surplus is larger than they would be in the absence of a price ceiling. Because of their privileged status Party members benefit from the price ceiling and have an interest in maintaining it. The Other group is not so lucky. Panel 2 shows the demand curve for Others, OTHER DEMAND. Since 16 units are supplied in total and Party members buy 10, there are only 6 units left for the others. From the point of view of the Others there is a fixed stock of 6 units, as shown. Others compete among themselves for the 6 units until the cost per unit is $7. For Others, the full price is higher and the Consumers' Surplus is smaller than they would be in the absence of a price ceiling. Others have an interest in removing the price ceiling. …