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THE PARALLEL MARKET IN CENTRALLY PLANNED ECONOMIES
Author(s) -
Panagariya Arvind
Publication year - 1989
Publication title -
economics and politics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.822
H-Index - 45
eISSN - 1468-0343
pISSN - 0954-1985
DOI - 10.1111/j.1468-0343.1989.tb00010.x
Subject(s) - planned economy , economic shortage , economics , enforcement , variety (cybernetics) , general equilibrium theory , state (computer science) , welfare , market economy , microeconomics , business , government (linguistics) , artificial intelligence , political science , computer science , law , linguistics , philosophy , algorithm
This paper presents some general‐equilibrium models of the parallel market in centrally planned economies. The models are based on the hypotheses that private firms can operate more efficiently than bureaucratically‐run state enterprises and that Soviet‐type economies are characterized by price controls and quantitative allocations. The state's enforcement policy is explicitly modeled. Although the welfare implications of the parallel market for workers are ambiguous in general, under a variety of circumstances they turn out to be negative. For instance, responding to the shortage created by price controls, illegal firms divert resources from the official economy into the parallel market. The result is a higher price in the parallel market without any increase in the total supply of the good.