NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL.

ECONOMICS PROJECT -1
PRICE AND NON-PRICE RATIONING

SUBMITTED TO: SUBMITTED BY:

Prof. RAJESH GAUTAM SHREYA CHANDHOK
(2018BALLB75)
 ACKNOWLEDGEMENT

On the completion of this project, I take the opportunity of thanking the people who
contributed in the completion of it, without whose aid, contribution and help this project
wouldn‘t have seen practicability. First I extend my heartfelt gratitude to, my mentor and
teacher, Prof. Rajesh Gautam whose continuous guidance and support provided me with the
much-needed impetus and gave me a better insight into the topic. I am grateful to the IT Staff
for providing all necessary facilities for carrying out this work. I thank all members of the
Library Staff for providing me the assistance anytime needed.

I also thank my friends and batch mates for providing me the much needed aid whenever
needed. Most importantly, I would like to thank my parents for providing me the much
needed force for accomplishing this project.
INTRODUCTION

WHAT IS RATIONING ?

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 artificially depresses the price by putting constraints on demand
(alternatively, price ceilings can be imposed, creating the need for rationing in order to
maintain a certain level of supply). Rationing generally results in shortages.1

According to the classical economic theory when demand exceeds supply, prices rise, and
high prices in turn reduces the demand and new enterprises to come into the market, which in
turn brings back the prices to reasonable level. Rationing can create shortages and the
problem that some goods and services such as food, fuel and medical care have an inelastic
demand, that is, it does not fall in proportion to increase in price. The entry of new suppliers
may not be possible in case of a crop failure, war, natural disaster or embargo. Governments
typically are faced with the problem of allowing the prices of basic necessities to rise
inexorably, or imposing rations, governments choose the latter.

Because resources are finite, and desires are infinite, no one can have as much of a good as
they desire. This means that the resources are scarce. This causes the need for a way to divide
resources up among individuals, or rationing systems.2

According to Economic Times:

Rationing refers to an artificial control on the distribution of scarce resources, food items, industrial
production, etc. In banking, credit rationing is a situation when banks limit the supply of loans to
consumers. In economics, rationing refers to an artificial control of the supply and demand of
commodities.3

1
https://www.investopedia.com/terms/r/rationing.asp ;last visited on 23rd august,2018 22:08
2
entralecon.wikia.com/wiki/Rationing_Systems
3
https://economictimes.indiatimes.com/definition/rationing ; last visited on 24th august, 2018 00:18
REVIEW OF LITERATURE
SANDEEP GARG :

Price controls are government-mandated legal minimum or maximum prices set for specified
goods, usually implemented as a means of direct economic intervention to manage the
affordability of certain goods. Governments most commonly implement price controls on
staples, essential items such as food or energy products. Price controls that set maximum
prices are price ceilings, while price controls that set minimum prices are price floor.

TR JAIN V.K OHRI :

Price mechanism affects an economy in the long term, it plays an important role in
determining prices in a capitalist economy. Further, price mechanism can be applied to the
fuel for cars. If it becomes more expensive, it won’t lead to decrease in demand because the
demand is inelastic but eventually companies will start to produce alternatives such as
biodiesel and electric cars. Under price mechanism the allocation and distribution of goods
and services are made on the basis of relative market price.

OBJECTIVES :

 To study the impact of government rationing

 To study interest of consumers through the supply of essential goods at controlled prices.

HYPOTHESIS
Rationing is done to ensure the proper distribution of resources without any unwanted waste.

METHOD OF STUDY

The method of study used in the following project is DOCTRINAL METHOD.

 Table of Contents
 ACKNOWLEDGEMENT ........................................................................................... 2

 INTRODUCTION........................................................................................................ 3

 REVIEW OF LITERATURE ..................................................................................... 4

 OBJECTIVES : ............................................................................................................ 4

 HYPOTHESIS.............................................................................................................. 4

 METHOD OF STUDY ................................................................................................ 4

 WHAT IS PRICE RATIONING? .............................................................................. 6

 THE INCENTIVE FUNCTION OF THE PRICE MECHANISM .............. 6

 THE SIGNALLING FUNCTION OF THE PRICE MECHANISM ...................... 7

 ROLE OF GOVERNMENT ....................................................................................... 8

 WHAT IS NON-PRICING RATIONING? ............................................................... 9

 PRICE CONTROL:................................................................................................... 12

 PRICE CEILING. ...................................................................................................... 12

 PRICE FLOOR:......................................................................................................... 15

 CONCLUSION .......................................................................................................... 17

 BIBLIOGRAPHY ...................................................................................................... 19
WHAT IS PRICE RATIONING?

The rationing function of the price mechanism. Whenever resources are particularly scarce,
demand exceeds supply and prices are driven up. The effect of such a price rise is to
discourage demand and conserve resources. The greater the scarcity, the higher the price and
the more the resource is rationed.4

THE INCENTIVE FUNCTION OF THE PRICE MECHANISM

Incentives motivate a producer or a consumer to follow a particular course and change

behaviour accordingly. Higher prices leads to higher incentives to the existing producers in
the market and they are motivated to supply more which in turn provides more revenue and
increased profits, this further leads to an extension of supply along the existing curve.

DIAGRAMATIC REPRESENTATION

4
http://www.economicsonline.co.uk/Competitive_markets/Rationing_and_incentives.html
THE SIGNALLING FUNCTION OF THE PRICE MECHANISM:

Price changes usually are contrasting for both consumers and producers and point to a
situation whether to enter or leave a market. Rising prices give a indication to consumers to
reduce demand or withdraw from a market completely, and they give a signal to potential
producers to enter a market. Conversely, falling prices give a positive signal to consumers to
enter a market while they send a negative signal to producers to leave a market. For example,
a rise in the market price of a ‘smart’ television sends a signal to potential manufacturers to
enter this market, and perhaps leaves another one. In terms of the labour market, a rise in
wage of the labour which is the price of labour, provides a signal to the unemployed to join
the labour market. This function is associated with shifts in supply and demand curves.

BASIC FEATURES OF CONTROLLED PRICE MECHANISM ARE:

 Prices are fixed by the government.

  Central Planning Authority takes all the decisions on production on behalf of the
government.

 The authority determines the level of new investment.

 The authority allocates resources in different sectors for optimum utilisation.

 The authority distributes the different goods among the consumers through ration
shops or fair price shops.

 The government fixes the prices of the different factors of production like wage rate
and interest rate etc.5

ROLE OF GOVERNMENT

The government plays two types of functions , direct and indirect.

DIRECT ROLE:

(i) Price Ceiling

(ii) Public Distribution System and Rationing

(iii) Price Floor and Agricultural Development

(iv) Public Sector Production and Industrial Development

(v) Government Imports

(vi) Government Expenditures for the Purchase of Commodities.

(vii) Government Exports.

INDIRECT ROLE

It is again sub-divided into two ways, such as:

5
http://www.economicsdiscussion.net/articles/controlled-price-mechanism-features-and-role-of-price-
mechanism/2058 ; Last visited on 24th august 02:05
(1) Monetary Policy:
It consists of several policies taken by the Central Bank of the country such as:

(i) Monetary policy during recession;

(ii) Monetary policy during inflation.

(2) Fiscal Policy:

The government can play an indirect role in the economy through its fiscal methods. It affects
the revenue and expenditures of the government.6

WHAT IS NON-PRICING RATIONING?

Government’s implement non-price rationing for some national purpose, over-ridding

individual preferences. Thus, during war, individual preferences are made subservient to the
aim of national survival, and many market activities are replaced by direct controls. It would
be pointless in these circumstances to evaluate the resulting allocation by reference to that
achievable by the undirected price mechanism, since the validity of that norm requires the
acceptance of individualistic values that have been deliberately rejected by the government.

The government's aim in opting for non-price rationing is a less compel1ing one than national
survival. The following are some of the more usual motives:

 to shift the burden of adjustment to the scarcity of some good or goods from some groups
to other groups - for example, from the business sector to the household sector; .

 to avoid or mitigate the income-distributional consequences of sudden and sharp rises in

the price of a good;

 to suppress the symptoms of inflation; and .

 to respond to a perceived demand from the electorate that the government does
something positive in a crisis situation.

6
http://www.economics-ejournal.org/economics/journalarticles ;
 As compared with price rationing, non-price rationing involves three main types of cost,
these are:

 administrative and enforcement costs;

 misallocation of the good; and

 real transaction costs incurred by consumers (especially queuing costs).7

LIMITATIONS OF PRICE MECHANISM:

(1) Imperfection of completion: The working of price mechanism presupposes the existence
of perfect competition which is not the case, instead there exists a monopolistic market
which prevails in the society. This leads to rise in prices and have a negative impact on
consumers.

(2) Loss of consumer’s sovereignty: It is usually stated that under the market mechanism
the consumers enjoy complete freedom and are able to have a choice of goods and services.
But nowadays a consumer is not sovereign because they are influenced by social media and
advertisements and also due to inequality in incomes the market demand represents the
demand of only well to do consumers.

(3) Unequal Distribution of Income: the price mechanism through completion brings huge
profits to big producers, the landlords, the entrepreneurs and the traders who accumulate vast
amount of wealth and luxury the poor live in poverty and squalor.

(4) Non-utilization if resources: resources are used efficiently due to cut throat
competition, inequalities in income distribution and over production which further leads to
wastage and depression.

Price mechanism affects an economy in the long term, it plays an important role in
determining prices in a capitalist economy. Further, price mechanism can be applied to the
fuel for cars. If it becomes more expensive, it won’t lead to decrease in demand because the
demand is inelastic but eventually companies will start to produce alternatives such as

7
https://bitre.gov.au/public ations/1981/files/op_044.pdf
biodiesel and electric cars. Under price mechanism the allocation and distribution of goods
and services are made on the basis of relative market price.

WHY DO GOVERNMENT’S INTERVENE :

There exists many inequalities in the market, in an optimally efficient market resources are
perfectly allocated and there is an equilibrium in the society but in inefficient markets
government has to intervene. By this action government tries to take many different forms in
the form of regulation, taxation and subsidies.

MAXIMIZING SOCIAL WELFARE:

In an unregulated and inefficient market, cartels land other types of organisations can lead to
rise in monopolistic power, limiting the development of society. This leads to inefficient use
of resources and can produce negative externalities, government’s intervention can directly
help by addressing these issues.

NON-MARKET PRICE
The practice of keeping the prices of many goods ,services, and resources artificially high or
low by governments or private firms to maintain stability in the society, this is done because
markets might not clear efficiently.

PRICE CONTROL:

Price controls are government-mandated legal minimum or maximum prices set for specified
goods, usually implemented as a means of direct economic intervention to manage the
affordability of certain goods. Governments most commonly implement price controls on
staples, essential items such as food or energy products. Price controls that set maximum
prices are price ceilings, while price controls that set minimum prices are price floors.8

THE ECONOMIC BASIS OF PRICE CONTROL:

The government uses price control with good intentions , as a measure to bring stability in
the society, but as a result, no attempt to control prices can overcome the market forces of
supply and demand for any significant length of time. When prices are established due to the
free market forces the government intervenes to impose price controls simply because it
refuses to accept the general price level in the economy which further leads to creation of
excess demand in case of price ceilings and excess supply in case of price floors.

Price control can be further divided into :

 Price ceiling
 Price floor

PRICE CEILING.

8
www.investopedia.com/terms/p/price-controls.asp ; last visited 24th august,2018 18:40
Price ceiling is the maximum price which can be charged by a seller on a product or service.
Governments impose price ceilings to protect consumers from conditions that makes products
prohibitively expensive. It is done to protect the interest of the consumers. Price ceilings are
usually imposed in areas which are essential to a consumer. Such conditions occur during
periods of high inflation or in the event of monopoly ownership of a commodity.

For example price ceilings are imposed in area of Rent control which can be illustrated
through the following diagram:

RENT CONTROL
IMPACT IN SHORT
RUN.
 RENT CONTROL
IMPACT IN LONG
RUN.

Rent control is a form of price control that limits the amount a property owner can charge for
renting out a home, apartment or other real estate. Rent control acts as a price ceiling by
preventing rents either from being charged above a certain level.9

BREAKING DOWN RENT CONTROL :

Rent control was introduced to protect consumers from the high priced houses and to control
their price in the market. In the short run it becomes difficult for both buyers and sellers to
adjust and therefore shows an inelastic supply as it is not feasible to construct new houses in
such a short period of time.

In the long run it discourages property owners to build new housing stock as it is not giving
them any profits, while others believe that rent control is a viable method as it ensures
affordable living and prevents landowners from raising prices capriciously.

BLACK MARKETS AND PRICE CEILING

A black market is a market outside regulation and the official economy. When a shortage of a
good occurs, some buyers will have managed to buy the good. They could then sell the good
to buyers without that good. This creates another market which can alleviate shortages by
allowing some good-less buyers to obtain that good.10

Market is any effective arrangement for organizing buyers and sellers together. Black
markets is the arrangement which is not under the control of government. Products sold are
illegal and fake and are usually sold at a higher price. Due to price ceiling the sellers start
holding back the commodities with the intention of selling it later at a higher price, this again
9
https://www.investopedia.com/terms/r/rent-control.asp
10
Why do price ceilings cause shortages? What is a black market and why might it alleviate shortages?. [online]
Available at: https://12hsuela.wordpress.com/2010/10/10/why-do-price-ceilings-cause-shortages-what-is-a-
black-market-and-why-might-it-alleviate-shortages/ [Accessed 24 Aug. 2018].
leads to the exploitation of the buyer because the goods are usually the necessities and there
demand is inelastic which in turn forces them to buy those commodities at a much higher
price.

The government needs to take a step ahead and ensure that such activities don’t take place,
proper regulation needs to take place and surprise checks need to be made. Government
should further employ people who will keep a check on these illegal activities and will report
if any such activity takes place.

PRICE FLOOR:

A price floor is the lowest legal price a commodity can be sold at. Price floors are used by the
government to prevent prices from being too low. The most common price floor is the
minimum wage--the minimum price that can be payed for labor. Price floors are also used
often in agriculture to try to protect farmers.11

For a price floor to be effective it must be above the equilibrium price otherwise it will be
sold below the equilibrium price of the market and it will be of no use. Due to the rise in
price above equilibrium, consumers aren’t willing to buy as much quantity. Since the price is
above the equilibrium price the suppliers are willing to sell more, which in turn leads to a
conflict of interests between the buyers and the sellers.

In order to handle the situation the government intervenes. An example of a price floor
is minimum wage laws; in this case, employees are the suppliers of labor and the company is
the consumer. When the minimum wage is set above the equilibrium market price for

11
http://economics.fundamentalfinance.com/micro_price-floor.php
unskilled labor, unemployment is created (more people are looking for jobs than there are
jobs available). A minimum wage above the equilibrium wage would induce employers to
hire fewer workers as well as allow (or entice) more people to enter the labor market; the
result is a surplus in the amount of labor available. However, workers would have higher
wages. The equilibrium wage for workers would be dependent upon their skill sets along with
market conditions.12

Price floor which is useful for the farmers leads to excess supply in the market, the
government then purchases this stock from the farmers at the minimum support price13 and
stores that stock as Buffer stock. The buffer stock which is stored in the warehouses is
distributed through Public Distribution system14

12
CBO-The Effects of a Minimum Wage Increase on Employment and Family Income-February 2014
13
Minimum Support Price is the price at which government purchases crops for the farmers, to safeguard the
interests of the farmers.
14
Public distribution system is a government-sponsored chain of shops entrusted with the work of distributing
basic food and non-food commodities to the needy sections of the society at very cheap prices.
APPLICATION OF PUBLIC DISTRIBUTION SYSTEM:

 Helped to ensure that the poor section of society also have the access to the food.
 Public distribution system helps in stabilising prices and making food available at
affordable prices.
 It maintains the buffer stock of food grains in the warehouse so that the flow of food
remain active even during the period of less agricultural food production.

 The Public Distribution System also keeps an eye on the hoarders and black marketers
who try for windfall gain at the cost of poor people and other consumers.

CONCLUSION
Prices of goods can be determined in two ways, it can be either by the forces of demand and
supply which is not merely of great theoretical importance but it has important several
practical applications in economic life of a country. This analysis of demand and supply can
be used to explain the implications of price control and rationing, minimum price fixation,
incidence of taxes and several other economic problems. The government interferes with the
price to promote social welfare which can be done in two ways, either by price ceiling or by
price floor. The government fixes the maximum price ( price floor) or fix the minimum price
(price ceiling) , this helps them to promote welfare of the people. The government can
impose taxes or provide subsidies to affect the market demand and supply. Black marketing
which has been discussed is a negative effect of price control and promotes ill practices ,
which in turn raises the price of essential commodities. This happens because the consumers
who want to procure large quantity than the rationing price will be prepared to pay a higher
price to get some quantity in the black market. Minimum support which has been mentioned
is an important policy which helps farmers to procure the minimum price for their produce.
The government fixes the price above the equilibrium price to ensure a sustainable amount.

Rationing therefore is a tool which helps bring stability in the economy by applying various
tools. It also helps in a controlled distribution of scarce resources and goods and is often
termed as an artificial restriction of demand. Rationing fixes the price above or below the
equilibrium price according to the situations prevailing in the society.
BIBLIOGRAPHY

WEBSITES

 https://www.investopedia.com/terms/r/rationing.asp
 https://economictimes.indiatimes.com/definition/rationing ;
 http://www.economicsonline.co.uk/Competitive_markets/Rationing_and_incentives.h
tml
 CBO-The Effects of a Minimum Wage Increase on Employment and Family Income-
February 2014
 http://economics.fundamentalfinance.com/micro_price-floor.php
 https://www.investopedia.com/terms/r/rent-control.asp
 www.investopedia.com/terms/p/price-controls.asp
 https://bitre.gov.au/public ations/1981/files/op_044.pdf
 http://www.economics-ejournal.org/economics/journalarticles ;

BOOKS

 Introductory micro economics, Sandeep Garg

 Introduction to micro-economics, T.R Jain, V.K Ohri