At a Glance of Rationing Prices
This Blog Discusses What is Rationing by prices, How to Perform Situation Analysis? and also talks about What is the interrelation between Human nature and incentives because humans tend to be complacent when the right incentive is absent. In this article, we also tried to find a suitable conclusion related to the topic.
Following Block-Diagram will provide you a Roadmap to understand the concept entirely.
Rationing by prices
Rationing by prices means the distribution of resources optimally with the help of prices. Prices do rationing so efficiently and smoothly that most of us don’t understand that it performs that function.
In the previous blog, we got to know about supply and demand and prices relationship. We saw that at different prices, we have different supply and demand. Now we need to understand how that relationship actually ends up serving us.
Most of the time, groups of people complain about high or low prices according to the situation and what suits them. And as soon as we see government succumb to the pressure, no matter how logical the move seems to us, we pay prices as a whole society.
For instance, when we see a city hit by any natural calamity like an earthquake or tsunami. We see many people become homeless because of such natural disasters. Suddenly, all the basic things like water, food, and rooms become so much in demand. The high demand the prices of the hotel rooms available in the outer part of the city increase drastically. You will surely think that the government should control the prices in this case of hotel rooms and make them affordable so that everyone in a bad situation can get the room. I suppose you might be wrong here. You made an impulsive decision without much understanding of the situation and human nature.
Rationing – Situation Analysis
We must understand the whole situation here. Let us assume that 200 (average people per family be 5) families in the city have become homeless. 100 hotel rooms are available, which are useable after the earthquake. If the prices are high, which is natural here as demand is high, one family will adjust in one room. And a small family will rent the room together with another small family so that they save money. By doing such things, let us say these 100 hotel rooms can accommodate 100 families. Then the government now has to adjust the remaining 100 families. They may use a tent system to accommodate these 100 families. You can see how the resources got distributed.
If the prices had been kept low artificially by the government, the situation would have differed. We need to understand that more families can afford the hotel rooms at lower prices, say 150, but only 100 rooms are available. The distribution of the rooms can be done based on a first-come, first-serve basis.
But now, we will see a twist in the tail. As the prices are low, instead of adjusting to one room, a family will demand more room for the same number of people. Small families will buy separate rooms instead of adjusting in with another small family. The 100 hotel rooms will now end up accommodating only 70 or 60 families. The government now has to build more tents to accommodate the remaining families, taking more time and resources.
The high prices efficiently accommodated 100 families, and fewer families were needed to be given the tent solution. People had the incentive of saving money.
Human nature and incentives.
Humans as a society tend to be complacent when the right incentive is absent. History is the proof of it. Everyone wants the best for themselves, but as soon as that motivation is missing, they start to go in the wrong direction. Hardly few people in history have worked selflessly for the more significant cause.
When we observe a country like India, there is scarcity water at some places in the same country, and there is a wastage of water at other places. The main reason is the prices of water are kept artificially low by the government. The people living in scarcity make the optimum use of water with high precision and show how much less water is required for humans. In contrast, the people with no scarcity are wasting water wherever they can.
Had the prices been kept according to supply and demand and not artificially low. These people would have started to make optimal water use as they now have an incentive to save water to save money. When offered the right encouragement, people begin to act in a much efficient way.
Similarly, in Soviet Union days, Eastern Europe, a majorly part of the Soviet Union, had very black and fertile soil. Still, many places had malnutrition, and food had to be imported. The government had maintained low prices on food which gave no incentives for the farmers to do good farming as profits were down. The people here use to waste food as it was cheap. The people in the more eastern part of the Soviet Union faced food scarcity. This was a classic example of how effective prices are. Government should not focus on controlling. Instead, they should focus on providing the right incentive to society while making economy-based decisions.
Conclusion
The rationing done by prices is very efficient unbiased, and independent on emotions. Demand and supply, prices if functioned freely, tend to make the situation better for society. Suppose decisions taken by the government are not accepted to provide the right incentive to people. In that case, the aim fails—society pays a high cost for the failure. Human complacency should be negated with the right incentive to achieve new heights, peace, and prosperity.
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