Rationing

There is only so much of everything (supply).  Somehow, those who have or provide the resource need to figure out how to ration that limited resource among those who want it (demand).  What are some options?

 

There are 4 hamburgers at Mr. Sloppy's Rough House Café but there are 5 customers who want hamburgers.

 

Brute Force: Bluto is the biggest and meanest customer and Popeye has no spinach on hand.  Bluto takes all 4 hamburgers.  Everyone comes back the following day in hopes that Bluto isn't there to take all the hamburgers again.  This is a system used in countries with a weak rule of law.  The strong take what they want.  This system is beneficial to the least number of people and actually has a negative effect on supply.  Who wants to produce the good if it is just going to be forcibly taken.  Thus, it will do the worst job of rationing the scarce supply while also making the supply more scarce.  This would be most equivalent to despotism.

 

First Come First Serve: Wimpy was first in line.  Then comes Bluto, Popeye, and Olive Oyl.  There are no hamburgers left for Poopdeck Pappy.  Poopdeck Pappy makes sure to be first in line tomorrow.  This is the rationing system that was used by the Soviets, and is currently used by US Veterans Administration and the British National Health Service.  The First Come First Serve system provides for everyone but it has a built in delay since the current supply doesn't meet current demand.  The delays will serve to limit demand by some people finding an alternative, go without care, or die during the wait (e.g. the VA Scandal).  As the cost to the consumer (demand) is paid through taxes, there is no limit to how much product is consumed if one is willing to stand in line.  Government provides the supply and has an incentive to provide enough to prevent hostile voters but not enough to eliminate waiting times.  This is socialism.

 

Price: Popeye, Olive Oyl, Poopdeck Pappy, and Bluto each buy a hamburger.  Wimpy can't afford a hamburger until Tuesday.  Wimpy comes back on Tuesday when he can afford a hamburger.  This system is used by McDonalds, Apple, Toyota, PepsiCo, and countless others.  This system is the most dynamic of the bunch.  As the price rises, some consumers are no longer able to afford the product.  However, suppliers have an incentive to be more efficient - and thus lower their price - to expand the number of consumers who can afford their product.  Also unlike the other systems, a price system allows consumers to pay for different levels of quality (e.g. an old jalopy, a used 2005 Honda Civic, or a 2017 Rolls Royce).  This is capitalism.

 

Each system has winners and losers.  Price has consistently provided the most winners and fewest losers.  Best to ration by price.