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ALLOCATION EFFECT: The goal of imposing taxes to change the allocation of resources, that is, to discourage the production, consumption, or exchange or one type of good usually in favor of another. This is one of two reasons that governments impose taxes. The other reason is the revenue effect. Because people would rather not pay taxes, taxes create disincentives to produce, consume, and exchange. If society deems that less of a particular good, such as alcohol, pollution, or cigarettes are "bad," then a tax can reduce its production and consumption, and thus change the allocation of resources.

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PRICE RATIONING:

The distribution or allocation of a limited commodity using markets and prices. Rationing is needed due to the scarcity problem. Because wants and needs are unlimited, but resources are limited, available commodities must be rationed out to competing uses. Markets ration commodities by limiting the purchase only to those buyers willing and able to pay the price.
As a general process, rationing is the distribution of a given amount of goods or services among competing users. Price rationing is a method of rationing that allocates the limited quantities of goods and services using markets and prices.

Price rationing works like this. If the quantity of a given commodity becomes increasingly limited, then the price rises. Only the buyers most willing and able to buy the commodity, and pay the higher price, obtain the good. The limited quantity is automatically rationed to the highest bidder.

Usually Efficient

Rationing through markets and prices is usually an effective, efficient method of allocating commodities. It works automatically and under the right circumstances, it achieves an efficient allocation of resources. That is, commodities are allocated to those buyers willing to pay the highest price because they receive the greatest satisfaction.

Moreover, not only do prices ration existing quantities, they provide incentives to improve resource allocation in the future. That is, society is encouraged to direct resources to the commodities with higher prices, which then increases available quantities in the future.

Government Rationing

Society has developed two primary methods of rationing (or allocating) limited resources, goods, and services--markets and governments.

Governments ration commodities through what can be termed regulatory rationing. That is, governments pass laws that determine who receives what. Any number of criteria can be set for regulatory rationing. For example, each person might receive an equal share or some might receive more based on some determination of need.

Regulatory rationing is often used when governments decide that price rationing does not work properly. In particular, a government might deem that the sudden price increase of an essential good like food or gasoline creates undue hardships for the poor. As such, they might establish a system for rationing the commodity using coupons, price ceilings, or some other mechanism that does not involve higher prices.

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Recommended Citation:

PRICE RATIONING, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: December 7, 2019].


Check Out These Related Terms...

     | rationing | resource allocation | voluntary exchange | involuntary exchange |


Or For A Little Background...

     | equity | incentive | exchange | market | price |


And For Further Study...

     | government functions | distribution standards | allocative efficiency | shortage | auction | ownership and control | price ceiling | price floor | elasticity | utility analysis | short-run production analysis |


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