Welfare costs and rent premia when quotas are not transferable

Rationing is pervasive in transition economies and in many developing countries. This paper contrasts the welfare costs of two forms of rationing: with and without license transferability among license holders. In the latter case, for a given level of rationing, welfare costs will be higher if users of rationed products have different elasticities of demand. Illustrative general-equilibrium-based numerical calculations are carried out to derive orders of magnitude of the costs of rationing for an economy that trades 40 percent of its GDP with half of its imports concentrated in manufactures. In this setting, rationing of manufactures to 70 percent of their free-trade desired level reduces free-trade income by 6 percent when licenses are transferable. Nontransferability of licenses adds approximately 20 percent to the costs of rationing. © 1994.

Duke Scholars

Author Alexander Pfaff Sanford School of Public Policy