Rationing

What is 'Rationing'

Rationing is the practice of controlling the distribution of a good or service in order to cope with scarcity.

BREAKING DOWN 'Rationing'

Rationing involves the controlled distribution of a scarce good or service. An individual might be allotted a certain amount of food per week, for example, or households might be allowed to water their lawns only on certain days.

According to the law of supply and demand, when the available supply of a good or service falls below the quantity demanded, the equilibrium price rises, often to unaffordable levels. Rationing artificially depresses the price by putting constraints on demand (alternatively, price ceilings can be imposed, creating the need for rationing in order to maintain a certain level of supply). Rationing generally results in shortages. 

For example, the 1973 Arab oil embargo caused gasoline supplies in the U.S. to plummet, pushing up prices. The federal government rationed domestic oil supplies to states, which in turn implemented systems to ration their limited stocks. In some states, cars with license plates ending in odd numbers were only allowed to fill up on odd-numbered dates, for example. These responses kept gas prices from spiking further, but led to long lines.

Classical economic theory suggests that when demand exceeds supply, prices rise, and high prices in turn curtail demand and encourage new entrants to the market, increasing supply and bringing prices back down to reasonable levels. If the reality were this simple, rationing would be both counterproductive – because it creates shortages – and unnecessary, since a the market will act to re-stabilize itself. The problem is that for some goods and services – food, fuel and medical care – demand is inelastic; that is, it does not fall in proportion to increases in price. Other problems keep markets from rebalancing as classical theory would predict: the entry of new suppliers may not be possible if the shortage is the result of a crop failure, war, natural disaster, siege or embargo.

Faced with the choice of allowing the prices of basic necessities to rise inexorably, or imposing rations, governments typically choose the latter. The choice may not be ideal, but it is not necessarily irrational, since the alternative may be unrest. 

Many capitalist economies have temporarily resorted to rationing in order to cope with wartime or disaster-related shortages: the U.S. and Britain issued ration books during World War II, for example, limiting the quantities of tires, gasoline, sugar, meat, butter and other goods that could be purchased. In communist countries, by contrast, rationing was in many cases a permanent or semi-permanent feature of daily life. In Cuba in 2017, a ration book entitles an individual to five pounds of rice, a bag of coffee and a half-bottle of cooking oil each month at next no charge. Since that is not enough to survive, Cubans must purchase additional supplies on the open market, where the price of rice is around 20 times higher.

Rationing provides governments with a way to constrain demand, regulate supply and cap prices, but it does not totally neutralize the laws of supply and demand. Black markets often spring up when rationing is in effect. These allow people to trade rationed goods they may not want for ones they do. They also allow people to sell goods and services for prices that are more in line with demand, undermining the intent of rationing and price controls, but sometimes alleviating shortages. Black markets often generate profit for members of the same government bodies that are imposing rations, making them almost impossible to eradicate. In some cases they are explicitly tolerated, as with Cuba's markets for goods that are rationed in insufficient quantities.