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Temporary prices set for new products, based on high initial production costs, were often maintained even after the two year experimental period, even though by then production costs had often gone down substantially due to larger scale production.
7.
The exceedingly
The irrational price structure entailed
significant costs to the Chinese economy. low prices for items like energy, minerals and transport services led to acute shortages of such items because low prices tended to encourage demand and discourage supply. This created serious bottlenecks constraining economic
growth.
8.
The inability of price signals to reflect consumers' demand often resulted in production having little regard to users' needs. As a consequence, there were critical shortages of goods in demand on one hand and large stocks of unwanted goods on the other. As an illustration of the economic wastes involved, it was not
uncommon for plants to be set up to further process state-provided materials which were supposed to be ready for use. To cite yet another example, although China's steel inventory stood at 20 million tons in 1980, it still had to import five million tons of steel products because the locally produced steel could not meet the requirements
of the users.
9.
Another problem associated with an
administrative price system is that it cannot be
sufficiently refined to reflect differences in the quality of goods. It used to be a common practice in China to assign one price to a broad range of similar products.
As
a result, incentives to produce high quality goods and to upgrade technology were stifled. Some enterprises even
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