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Better Lucky Than Rich? Welfare Analysis of Automobile Licence Allocations in Beijing and Shanghai

Shanjun Li

Review of Economic Studies, 2018, vol. 85, issue 4, 2389-2428

Abstract: Economists often favour market-based mechanisms over non-market based mechanisms to allocate scarce public resources on grounds of economic efficiency and revenue generation. When the usage of the resources in question generates type-dependent negative externalities, the welfare comparison can become ambiguous. Both types of allocation mechanisms are being implemented in China's major cities to distribute limited vehicle licences as a measure to combat worsening traffic congestion and air pollution. While Beijing employs non-transferable lotteries, Shanghai uses an auction system. This article empirically quantifies the welfare consequences of the two mechanisms by taking into account both allocation efficiency and automobile externalities post-allocation. Our analysis shows that different allocation mechanisms lead to dramatic differences in social welfare. Although Beijing's lottery system has a large advantage in reducing automobile externalities over auction, the advantage is offset by the significant allocative cost from misallocation. The lottery system in Beijing resulted in a social welfare loss of 30 billion Yuan (nearly $5 billion) in 2012 alone. A uniform-price auction would have generated nearly 20 billion Yuan to Beijing municipal government, more than covering all its subsidies to the local public transit system.

Keywords: Allocation efficiency; Automobile externalities; Auction; Lottery (search for similar items in EconPapers)
JEL-codes: Q58 R48 (search for similar items in EconPapers)
Date: 2018
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