Rationing Allocation

Rationing Allocation

Rationing, allocation of supplies of goods and services among consumers by means of coupons to replace or supplement the rationing function of money prices in a free exchange economy.

In exceptional circumstances, such as war, when there are sudden, severe or prolonged shortages of commodities regarded as essential, prices may rise beyond the means of people with lower incomes. Government enforcement of low prices would not ensure minimum supplies for all, because those 'first in the queue' would get as much as they could pay for and those at the end might get little or nothing. Rationing goes to the root of the problem by removing money as the source and measure of demand and ensuring supplies for all.

In a system of rationing based on coupons, everyone receives coupons entitling them to buy a limited amount of a commodity, usually at a fixed price. As the total 'purchasing power' of the coupons issued is made equal to the available supply, no one goes without (if the price is fixed sufficiently low), although many or most people have less than they would normally buy.

This system can be made more flexible by issuing coupons for a range of goods, such as all clothing or household equipment, rather than for a single commodity, thus giving the purchaser more freedom in deciding how to spend his coupons. Prices of rationed goods are fixed in terms of coupons as well as money and are occasionally adjusted to accord with the prevailing state of supply and demand. Ration coupons are, in a sense, a second form of money, with a specialized and limited circulation. They were used in many countries in and after World War II, and are used in some communist countries in peacetime.

Real Income, money income adjusted for changes in the level of prices. Comparisons of national income totals over a number of years require adjustment in this way if they are to mean anything. The 'general level' of prices is an abstraction, and adjustment in practice means using a series of indexes reflecting price changes in broad categories of expenditure on consumption, capital, exports, etc. Even so the resultant figures of real income reflect real economic welfare only imperfectly. They do not, for example, wholly reflect changes in quality or range of choice of goods and services.

Most theoretical economic relationships between income and other 'variables' (such as demand, consumption, expenditure, saving) are expressed in real terms.

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