Question

Why does an economy need a rationing​ mechanism?

Answer 1

Rationing is the practice of controlling the distribution of scare resources, goods, services and an artificial restriction of demand. An individual may be allotted a certain amount of food per week like household may be allowed to water their lawns only on certain days.

According to the law of supply and demand, if there is availability of supply of a good or service falls below the demanded quantity, then the equilibrium price rises to a unaffordable levels. Rationing artificially depresses the price by putting constraints on demand. It generally results in shortages. Rationing control the size of ration in which the allowed portion of the resources being distributed on a particular day or at a particular time.

A rationing mechanism is a sysytem for choosing which person get how many goods during a shortage. Black markets develop a way of rationing goods that are im shortage. Whenever the resources are particularly scare, the demand exceeds supply and prices are increased. The effect of such price rise is to discourage the demand and conserve resources. Greater the scarcity, prices will be higher and the more resources is rationed.

Rationing function of a price rise is associated with a contraction of demand along demand curve. Rationing provides government a way to constrain demand and regulate supply. Black market allow people to trade rationed goods and they also allow people to sells goods and services for price that are more in line with demand. They generate profit for member of the same government bodies those who are imposing rations, making them impossible to eradicate. There are many forms of rationing.

Rationing is done to keep price below the equilibrium price which is determined by the process of supply and demand in an unfettered market. So rationing can be complementary to price control. It is a system under which a government agency decides everyone fair share.