The Problem of Quantity Constraints on Classical Consumer Utility Theory

This paper highlights principally the works of Podkaminer (1982), Collier (1986) and later Smith (1; 2012) where econometric demand systems of western market economies were ʹtransplanted’ to Poland, the former German Democratic Republic and the former Soviet Union and it’s ‘satellites’ respectively to measure the implications to the traditional consumer choice problem of centrally-planned allocations. The techniques used provided estimates of the divergence between solely budget-constrained notional demands and those resulting when both budget and quantity constraints were binding. Based upon the demand model as modified in Smith (1; 2012), results showed that quantity constraints (i.e., rationing), an accepted and intended outcome of the command economy, ‘cost’ the average Soviet consumer in 1976 over 13 percent of their total expenditure budget at local prices. ‘Excess’ demands were found to range from as low as 11 to as high as 198 percent and ‘spillover’ demands ranging from 13 to 59 percent. These results also have important implications for public policy and commonly used methods for computing international comparison indices.