Rationing: Definition, Purposes, and Historical Example

What Is Rationing?

Rationing is the practice of controlling the distribution of a good or service in order to cope with scarcity. Rationing is a mandate of the government, at the local or federal level. It can be undertaken in response to adverse weather conditions, trade or import/export restrictions, or, in more extreme cases, during a recession or a war.

How Rationing Works

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 can artificially depress the price by putting constraints on demand.

Alternatively, price ceilings can be imposed; they risk the need for rationing in order to maintain a certain level of supply. In any case, rationing generally results in shortages. 

Rationing Example

The 1973 Arab oil embargo caused gasoline supplies in the U.S. to plummet, pushing up prices. The federal government responded by rationing 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, while cars with even numbered plates were only allowed to fill up on even-numbered days. These responses kept gas prices from spiking further but led to long lines.

Rationing to Combat Shortages

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. A 2019 economic crisis led Cuba to give every Cuban a ration book entitling an individual to small amounts of rice, beans, eggs, sugar, coffee, and cooking oil for the equivalent of a few cents in the United States.

Since that is not enough to survive, Cubans must purchase additional supplies on the open market, where the prices are significantly higher. Additionally, there are limits on the number of higher-quality items Cubans can purchase on the open market, such as chicken.

Risks of Rationing

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.

Black markets 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.

Methods of Rationing

There are a few ways markets can ration goods. Below are some of the more common methods:

• Price Mechanism: A price mechanism is one of the most widely used economic methods of rationing. When a good or service becomes scarce, its price naturally rises, limiting access to those who are willing and able to pay more. This method is effective in competitive markets where prices signal both consumers and producers to adjust their behavior. However, this approach can disproportionately affect lower-income individuals.
• Lottery System: A lottery system allocates scarce resources randomly, providing equal chances to everyone regardless of their financial situation. This method is used when fairness or equality of opportunity is prioritized over economic efficiency. It’s commonly applied in specific types of markets such as distributing event tickets.
• First-Come, First-Served: The first-come, first-served method gives priority to those who can access a resource the fastest, regardless of their financial status or need. This can be seen in situations like disaster relief distribution, where the order of arrival determines who gets the resource. While this method seems fair on the surface, it may favor those with more time or better access, which can lead to inequities.
• Rationing by Need: This method allocates resources based on the individual needs of recipients, often assessed by a governing body or organization. It is frequently used in healthcare or during humanitarian crises to ensure that those who require resources the most, such as the sick or vulnerable, receive them first. Under this type of rationing, it can be difficult to assess needs accurately (i.e. is it clear which medical patient should be prioritized over another one if there is a shortage of medical supplies?).
• Queue Rationing (Waiting Lists): Queue rationing involves placing people on a waiting list for scarce goods or services. This method is often used in healthcare systems, housing, or access to public services where resources are limited but in continuous supply. While this approach ensures that everyone eventually gets their turn, it can lead to long delays which may result in people eventually outpacing the need for their demand. For example, a waiting list for a popular rental property may cycle through people who have ended up being able to buy their own home in time.

Special Considerations

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 the market will act to 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. Moreover, the entry of new suppliers to rebalance markets may not be possible if the shortage is the result of a crop failure, war, natural disaster, siege, or embargo. While not ideal, rationing is often undertaken by governments that would otherwise be facing an even bigger economic crisis.

The Bottom Line

Rationing is a government-controlled practice used to manage the distribution of scarce goods or services, often during times of crises, like wars, natural disasters, or economic downturns. By limiting access to items like food and fuel, governments aim to prevent price spikes and shortages.

However, rationing can lead to black markets as people seek to evade the restrictions. While rationing does help curb demand, it does not eliminate shortages and can distort supply-demand dynamics, especially for essential items like food and medicine.