A note on the equilibrium and optimum of a transitional urban economy: The case of China *

. This research note presents a simple urban model of the Chinese two‐tier plan/market economy, and investigates the equilibrium and optimum by comparison with a standard urban model of the market economy. We show that the Chinese urban economy has a possibility of being out of equilibrium and becoming unstable when the amount of land assigned by the government to firms is too much relative to the labor assigned to them. Furthermore, the model indicates that, while the Chinese urban economy would have a greater total differential land rent than the market economy, the Chinese urban residents would be worse off in terms of their earned wage income.