In this exercise, we analyze the dual-track system of price liberalization that was implemented in China. Assume a market in which supply and demand follow, respectively, the following equations: P = 2 + 4Q, P = 14 - 2Q. What are the equilibrium price and quantity? Assume that a quantity of 1 must be delivered at the planned price of 5 on the plan track. Draw the supply and demand curve. Basing your computations on Figure 14.2, draw the consumer surplus under the plan track (assuming that those with the greatest willingness to pay are served first), and then draw the consumer and producer surplus under price liberalization, where the equilibrium quantity is traded at the equilibrium price. How will total consumer plus producer surpluses under the dual-track system compare with total surplus under full-price liberalization, that is, the standard market equilibrium?

Figure 14.2,

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PA PE Pp Qp 1 QE S D AO