TRADE AND POLITICS OF TRADE - WELFARE COSTS AND RENT PREMIA WHEN QUOTAS ARE NOT TRANSFERABLE

Rationing is pervasive in transition economies and in many developing countries. This paper contrasts the welfare costs of two forms of rati oning: with and without license transferability among license holders. In the latter case, for a given level of rationing, welfare costs wil l be higher if users of rationed products have different elasticities of demand. Illustrative general-equilibrium-based numerical calculatio ns are carried out to derive orders of magnitude of the costs of ratio ning for an economy that trades 40 percent of its GDP with half of its imports concentrated in manufactures. In this setting, rationing of m anufactures to 70 percent of their free-trade desired level reduces fr ee-trade income by 6 percent when licenses are transferable. Nontransf erability of licenses adds approximately 20 percent to the costs of ra tioning.