The Welfare Costs of Price Controls for Cars and Color Televisions in Poland: Contrasting Estimates of Rent-Seeking from Recent Experience

The welfare costs of price controls can vary enormously, depending on the method of allocating the good in shortage and the possible rent-seeking costs that may result. With full rent dissipation, the welfare loss from price controls on Polish color televisions in 1989 was about ten times the standard estimates of distortion costs, which ignore rent-seeking, and was more than 100 percent of the value of domestic producers'sales. The methods of allocating cars, however, did not result in rent-seeking costs. The domestic price controls were an unintended implicit subsidy to imports. Subsidies for cars were estimated at 43 percent and for color televisions at 22 percent. Although the macroeconomic features and accomplishments of the Polish "Big Bang " reforms of January 1990 have been extensively analyzed and debated (see, for example, Rocha and Coricelli 1991; Rosati 1991; Pinto, Coricelli, and de la Calle 1990; and Lipton and Sachs 1990), the impact of the reform at the microeconomic level has been largely unanalyzed.1 This article provides empiri-cal assessments of two phenomena that have been frequently discussed but rarely estimated. The first is the microeconomic policy changes in socialist econ-omies, in this case the benefits of price decontrol in the Polish automobile and color television industries, and of trade liberalization in the presence of domestic price controls. The second is the extent of rent-seeking activities in these markets and the relative magnitude of the traditional distortion costs compared with rent-seeking costs.2 1. Some examples of microeconomic empirical work in Poland include Konovalov (1989), Tar