Partial reform and full price liberalization in the short and the long run

Abstract

The performances of the gradual and big bang reforms are evaluated in the long run as well as the short run. We view the residual plan under the gradual reform as an institution that restrains state firms market power. In the short run, where competition from private business is nonexistent or inconsequential, this institution increases output and enhances social welfare, while the big bang reform, with state firms' monopoly power unchecked, may lead to a reduction in output and hurt consumers. In the long run, where the economy becomes more competitive, the plan quota as a restraint on market power becomes redundant and inefficient. It shifts production from the private firms to the less efficient state firms, causing welfare losses.