Rationing

Rationing Definition Economics

Rationing definition in economics refers to government policies that restrict the distribution of limited resources and consumer products according to a predetermined plan. This type of government policy is often implemented during time of crises such as wars, famines, or some other type of national disasters that affect the number of scarce resources that are incremental for the daily life of individuals.

It is important to note that the government implements rationing as a policy when resources such as water, oil, and bread are increasingly becoming scarce during time crises such as war.

Instead of allowing prices to grow to more market-driven levels, governments may limit goods such as food, fuel, and other necessities during conflict and other emergencies.

Non-price rationing, which involves limiting the amount of the quantity of a good one can consume, is arguably a better alternative than leaving it up to demand and supply forces to determine the market price and quantity during severe crises that impact scarce resources. That's because it provides an equal distribution of resources.

When there is a free market, those with higher incomes can outbid others with lesser incomes to purchase commodities that are in limited supply. On the other hand, if goods are rationed, which enables everyone to consume only a certain amount, everyone can consume such resources.

• It is important to note that a rationing alternative is considered to be better only in times of crises, such as war or drought. It is designed to ensure everyone has access to essential resources.
• Rationing, however, is not considered to be a good alternative in a free-market economy under normal times. This is because the government affecting demand and supply can cause an inefficient allocation of resources.

Rationing Examples

There are many rationing examples. Many crises have pushed governments to resort to rationing to combat these crises.

Effects of Rationing in Economics

To understand the effects of rationing in economics, let's assume that the economy is going through a severe oil crisis. The oil supply is plummeting, and the government decides to ration the amount of gasoline an individual can consume.

The price of gasoline set by the government is equal to 1$ per gallon.

Fig. 1 - Effects of Rationing

Figure 1 shows the effects of rationing on consumers such as Mike. Mike's yearly fuel consumption is shown along the horizontal axis, and the amount of money he has left over after paying for gasoline is shown along the vertical axis.

Because his salary is $30,000, he is restricted to the points on the budget line AB.

At point A, we have Mike's total income of $30,000 for the year. If Mike refrained from buying gasoline, he would have $30,000 in his budget for purchasing other items. At point B, Mike would spend his whole paycheck on fuel.

For one dollar a gallon, Mike could buy 5,500 gallons of gasoline per year and spend the remaining $24,500 on other things, represented by point 1. Point 1 also represent the point where Mike maximizes his utility.

However, as the government rationed the amount of gallons Mike could buy in a year, Mike's utility dropped to lower levels, from U1 to U2. At the lower utility level, Mike spends $2,500 of his income on gasoline and uses the remaining $27,500 for other items.

• When rationing occurs, individuals can't maximize their utility because they can't consume the number of goods they otherwise would have preferred.

Types of Rationing in Economics

The government can pursue two main types of rationing in economics to tackle crises:

non-price rationing and price rationing.

Non-price rationing allows individuals to access a commodity they otherwise would not be able to purchase since it ensures that every eligible person will get a minimum quantity of gasoline.

In addition to non-price rationing, there is also price-rationing, also known as a price ceiling, that the government may decide to implement as a policy.

Price ceilings were used in New York City after World War II. As a direct result of the end of World War II, there was a severe scarcity of housing, which led to soaring rent prices for apartments. At the same time, soldiers were returning home in large numbers and starting families.

Fig. 2 - Price ceiling below equilibrium

Figure 2 shows the effects of the price ceiling on the real estate market. As you can see, at $500, the demand is way higher than the supply, which causes a shortage in the market. That's because the price ceiling is below the equilibrium price.

Only a certain amount of people can rent houses using a price ceiling, which is represented by Q_s. That would typically involve individuals who have managed to get hold of rent first or individuals who had acquaintances that rented houses. This, however, leaves many other people (Q_d-Q_s) without the ability to rent a house.

While a price ceiling could be beneficial as a type of rationing because it ensures that prices are affordable, it leaves many individuals without access to necessary goods.

Problems with Rationing in Economics

Although rationing can be beneficial during a crisis, there are some problems with rationing in economics. The main idea behind rationing is to limit the number of goods and services one can receive. The government decides this and the right amount of rationing is not always chosen. Some individuals may need more or less compared to the amount that the government decides to provide.

Another problem with rationing in economics is its effectiveness. Rationing does not permanently eliminate the effects of the laws of supply and demand on the market. When rationing is in place, it's common for underground marketplaces to emerge. These allow individuals to exchange rationed items for ones that better suit their needs. Black markets undermine rationing and price restrictions because they enable individuals to sell products and services at prices that are more in line with demand or even higher.