Rationing

Rationing means the system to manage the scarcity of commodities, goods, and services that may arise at the macro or micro levels in an economy. The federal or state governments undertake measures to ensure price stability and control supplies of essential goods such as food, fuel, medicines, etc. 

Rationing allows authorities to restrict the export/import or phenomenal price rise of goods and services when they become scarce. Thus, the meaning of rationing under the law of demand and supply explains the rising prices of goods and services due to supply constraints and high demand, which limits the availability of essential goods.  

1. Rationing is a system to manage the scarcity of commodities, goods, and services or capital that may arise at micro and macro levels in an economy. 
2. It is a policy measure used by the government to mitigate the shortage of supply of essential goods such as food, fuel or drugs, and medicines so that due to excess demand, the prices do not skyrocket. 
3. For instance, businesses and companies employ capital rationing in case of scarcity of capital and thus decide to go ahead with the most profitable investment, among others. 

Rationing aims to overcome two major problems an economy faces – shortage and price rise. Thereby, rationing aims to mitigate shortages and control prices. As a result, governments worldwide ensure citizens’ welfare and enable a basic quality of life, especially during times of crisis.

For instance, crop failures due to natural calamities or the spread of diseases will push governments to introduce food rationing. As a result, due to crop failure, the government may impose embargoes or quotas on exports of essential food crops. 

Such measures ensure that essential food crops such as cereals, oilseed pulses, and vegetables can suffice domestic demand. Thus, avoid famine-like crises and skyrocketing prices due to supply imbalance. However, one major disadvantage of rationed supplies is that it gives rise to black or unauthorized markets.

Black markets or hoarding goods and services lead to greater exploitation of poor and vulnerable populations. For example, when supplies of essential goods such as drugs and medicines, fuel, or gasoline are limited, people try to sell these through unauthorized channels at higher prices to those in need. Thus, people are unable to meet their basic or socio-economic needs and get pushed into the plight of poverty.

Governments resort to price ceilings as a countermeasure to control hoarding and black marketing of essential commodities. Under the price ceiling mechanism, the government sets the maximum price chargeable for essential commodities. These include food, fuel, and medicines to make them affordable for the common person.

Similarly, businesses undertake capital rationing when they face a scarcity of capital or have received poor investments. Thus, they employ the available capital on more important projects or limit the capital investment on less important projects and inject it into a more important one.

To understand the implications of rationing explicitly and its causes, let us look at a few examples,

Example #1

During World War 2, rationing was introduced in the United Kingdom to regularize the fair distribution of food and scarce commodities. However, the food and fuel crisis began after the start of WWII. It led to the Ministry of Food's institution, which then established the rationing system. The situation was so dire that the UK imported more than half of its meat. Additionally, it imported 70% of cheese, 80% of fruits, and 70% of cereals and fat-rich foods.

Consequently, every man, woman, and the children was allotted ration books with coupons. It allowed them to purchase stapled quantities of food such as meat, bacon, and cheese. Whereas the points system regulated the quantities wherein allotment of points enabled limited consumption of certain items. These included quantities like tinned foods, cereals, dried fruits, and biscuits were available per supply available.

Later, as the war prolonged, so did the food rationing and the queues in front of ration stores. People could not access food even after standing in queues for long hours. In addition, other rationing systems, including petrol and fuel rationing, clothes, and soap, were being rationed.

However, black markets camped up that sold the rationed food at inflated prices to those who could afford it. As a result, the suppliers maintained a few supplies for below-the-counter sales from the available ration for the poor and needy.

Example #2

The escalation of the energy crisis in Europe due to the 2022 Russia and Ukraine tussle and geopolitical tensions has led to debates about gas rationing amongst the European leaders. Europe, which relies heavily on Russia for its energy, specifically natural gas needs, is facing scarcity. 

Europe generates 2/3rd of its energy from the supplied natural gas from Russia. However, with decreasing supply, households bear the brunt of high costs.

The energy prices are rising exorbitantly and are almost up by 35%, which is six times higher than two years ago in 2019. In addition, the Nord Stream pipeline, which supplies 40% of Europe’s gas, has been shut down by Russia. Russia’s act to avenge the sanctions imposed by western countries has worsened Europe’s existing natural gas and energy scarcity.

Governments and leaders in Europe are appealing to consumers and businesses for voluntary rationing and cutting down the demand for gas and energy. While the federal governments have taken other measures such as storage and employing more Euros to ease the price pressure, many analysts predict obligatory rationing by the government will be necessary with the onset of winters.

Let us now look at some positive and negative effects of rationing to balance the argument,

Positive Effects

1. Mitigate Inflationary Pressures – The governments mitigate the high demand and impose restrictions on sales, purchases, and prices of goods and services. 
2. Ensure availability of Essential Commodities – Commodities that ensure a basic standard of living like food, fuel, medicinal drugs, and clothing requires government intervention to eliminate hoarding and black marketing. The demand for such goods remains inelastic, and thereby rationing ensures their affordability and accessibility.

Negative Effects

1. Black Markets – The rationing policy often gives rise to the risks of parallel markets. It happens due to regulation of supplies and price capping by the government. It leads to below-the-counter sales of rationed goods, mostly at higher prices. Sometimes, these markets may alleviate the shortage, but they may also exploit the vulnerable or poorer people by demanding extremely high prices. 
2. Discourage New Suppliers – As per the law of demand and supply, the excess demand might encourage new suppliers into the market. Therefore, it will stabilize prices automatically without government intervention. However, when the government restricts supply and prices especially, it might discourage new entrants into the market.

However, as a short-term measure, the rationing policy is more beneficial.

Let us now explicitly look at the advantages of rationing for consumers, businesses, and governments in general, 

1. Price Control – Such scenarios occur when governments set a price ceiling to sell certain goods and services. For instance, the price ceiling by governments on COVID-19 vaccines ensured accessibility for the masses and not just well-off sections of society. 
2. Mitigates Shortage – The rationed supply of commodities is extremely useful and efficient in ensuring the supply of essential commodities. These include food, fuel, and clothing in times of uncertainty or when adverse weather conditions or warlike situations occur. 
3. Provides Time to Cope-up – The rationed supply of goods and services allows businesses and governments to cope-up with a crisis. These may include war or pandemics that may restrict excessive and unreasonable demand for commodities. 
4. Capital Allocation – Businesses or investors undertake capital rationing where they may restrict certain investments and projects to focus on more important ones. Thus, it enables them to choose the most profitable projects from a pool of available options and ensures investors relatively higher return on investment.  

This article has been a guide to Rationing and its meaning. Here, we explain how it works, its examples, positive and negative economic effects, and advantages. You can also go through our recommended articles on corporate finance –

• Supply vs Demand
• Law of Supply
• Economic Shortage