The “second economy” and resource allocation under central planning

A formal model of intermediate product reallocation through Second Economy markets in a centrally planned economy is discussed. The principal result is that there exists an equilibrium allocation determined in these Second Economy markets in spite of fixed official prices and centrally monitored trading at these prices. It is always a constrained Pareto optimum with respect to the initial plan-generated allocation. Hence, Second Economy markets can effectively and “second best” efficiently ration the intermediate-product “sellers' market” of a centrally planned economy.