Small and Large Price Reform

A simple model of an open exchange economy with two commodities is used to investigate the relative merits of small and large reforms: reforms are represented as movements in the relative price of the two commodities, achieved by tightening or relaxing quotas. Three approaches, based on majority voting, the costs of compensation, and social welfare, are used to compare the merits of small and large reforms. It is found that large reforms win more votes than small reforms, whatever the direction of change: that the ration of marginal gross burden of compensation to marginal net benefit is highest for small reforms: and that when distributional considerations are allowed to play a part, the shape of the social welfare function is wholly indeterminate. In particular, local minima in social welfare cannot be ruled out.