Rationing

Rationing is a set of measures to manage resource distribution in a situation of scarcity. Rationing policies are worked out by local or federal authorities in order to cope with the lack of supply for highly demanded goods and services. It is needed in case of crop failures, sanctions imposed on trading or import/export activities of a state or, in the worst-case scenario, because of recession or war challenges.

How rationing works

Rationing implies the controlled consumption of goods and services that exist in insufficient amounts. 

Basic strategies aimed at overcoming the lack of supplied items are built around price regulation and include two opposite ways:

Constrained demand strategy. The law of supply and demand suggests that when the demanded quantities of a product or service cannot be provided by suppliers, the market faces rises in equilibrium price to extremely high levels. By means of rationing, governments are trying to artificially hold the price escalation suppressing the demand. Citizens might be given food allowances based on weekly rations, for example, or made to limit their use of water resources on certain days.

Constrained supply strategy. During a crisis, the excess supply may be set and maintained at a lower level if policy makers decide to introduce price ceilings for the producers of scarce goods or services. 

The two approaches described share the same logic of creating a shortage in either supply of demand. In both cases, it can bring unwanted consequences.

Rationing: reasonable or not

According to the classical economic theory, markets have self-recovery mechanism that functions in the following way: when the demand for a product exeeds its supply volumes, it pushes up prices, encouraging new producers into the market, which balances supply and demand and causes the price to go down. This way of thinking can give us a false assumption that rationing is unnecessary and government intervention can rather be useless, if not harmful, as it creates a shortage in any way.

In reality, the demand for necessities - like food, fuel and medications - is inelastic and doesn’t drop with an increase in price. Likewise, it is impossible for a market to rebalance itself in case of bad harvest, war, natural disaster or economic sanctions. 

Risks of Rationing

Having to decide between uncontrolled price spiraling and risky rationing plans, in most cases, governments choose to take action. 

Rationing helps to suppress the demand and ensure more reasonable supply, as well as the market price, still, it has little to do with the actual needs of consumers and the sellers’ desire to make profit. That is, increased regulation from the government often leads to black market boom. People are starting to trade products they might not need for what they actually do, or violate rationing rules. Traders may be tempted to charge at a higher price that customers are ready to pay, which is, but sometimes alleviating shortages.

Rationing as a response to embargo

1973, in the US oil crisis, when Arab oil supplies were suspended by embargo causing American imports to shrink, gasoline stations were suffering from nationwide oil shortage. The federal plan was to distribute domestic oil between states that had to find a way to further ration supplied oil stocks.

Some states’ officials put into place odd-even rationing, which was a system allowing odd-numbered car owners to buy oil on odd-numbered dates, whereas drivers with even-numbered car plates could fill up on even-numbered dates. That generally prevented the prices from going up but generated a queuing problem.

Rationing as a wartime solution

To mitigate hunger civilians were facing during WW2, the British government issued ration books that served food rationing purposes. Using those books, people could purchase a limited amount of sugar, meat, fats and other foodstuffs.

Rationing as a part of life or crop failure way-out

In the communist world with a fair share philosophy, rationing has often been part of a centrally planned economy, making up people’s lifestyle and buying habits. Take Cubans who have been using food ration books since the 2019 crisis. Those were introduced to regulate access to many goods from foods to toothpaste but still remain an everyday-use item. The scarce amounts of goods in the consumer basket are not enough, so Cubans make additional purchases in open markets. The prices are several times as high there and products, except for those provided by the government, very pricey and in short supply.

To sum up

• Rationing is done by means of government regulations in market policies to control the distribution of goods among the population.
• It is used as a way out for governments looking to mitigate the impact of scarcity during a crisis.
• Rationing is a risky decision that can lead to the emergence of black markets and give rise to other illegal practices, because people will naturally try to live up to the comfort level they got used to.