Dual-Track and Mandatory Quota in China's Price Reform*

China's price reform has been progressing through the mandatory quota (MQ) and dual-track schemes; a unique characteristic of China's gradualist approach to economic transition. The purpose of this paper is to show how MQ, properly modified, has been a bridge from a planned to a market-oriented price system. We analyze six criteria: industry output, average price, excluded buyers, buyers' surplus, producers' surplus and deadweight loss (not necessarily all independent) in our welfare comparison of a competitive market, monopoly and MQ form of market structure. A more general analytic formulation of our model and a graphic representation of the process are shown in the Appendix.