Updated: Aug 20, 2021

Allocation of scarce commodities by administrative decision rather than price. Many countries, for example, ration food and clothing in wartime. The argument for rationing is based on considerations of both equity and efficiency: governments want nobody to starve, and fit workers are needed for war production. Rationing is typically inefficient, especially in dealing with goods where tastes differ widely. If quantity is rationed and the price is kept low, users will get little benefit from a scarce good have little incentive to economize on it, and producers have no incentive to increase the supply. If goods are needed irregularly, and rationing prevents enough being bought on those occasions when the need arises, every user has an incentive to take up their ration regularly emergency stockpile. Thus, since more may be needed in dispersed small stocks than in one central reserve, rationing may actually encourage consumption and make shortages worse. The administration of rationing schemes itself also uses scarce resources. See also credit rationing.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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James Knight
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James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.