Welfare Analysis of the Vehicle Quota System in China

Abstract

This paper investigates the impact of the vehicle quota system of Shanghai, China, on two Chinese passenger vehicle markets. The empirical findings suggest that, conditional on purchase of a license in a quota system, consumers intend to purchase more expensive high-end vehicles since the customers who can afford the license are less price-sensitive. Hence, this system puts manufacturers of low-end cars at a disadvantage. A simulation of the vehicle registration tax system of Hong Kong shows that a progressive tax system is as effective as the quota system in vehicle control but also is able to protect the indigenous brands.