Coupon rationing and rent-seeking bureaucrats

Abstract

Prices perform an important rationing function in market economies. When government price controls contravene this function, alternative rationing procedures come into play. This note is concerned with formal coupon rationing and, in particular, with the tendency of democratic governments to legally prohibit market exchange of ration coupons. Participants in such a market have nothing to gain and potentially much to lose from such restrictions. Hence, the tendency of policy-makers even to consider, much less adopt, such restrictions might seem rather puzzling. However, it will be argued here that a 'black' market in coupons offers a greater opportunity for bureaucratic rent-seeking than does a white market. In addition, producers of the rationed commodity may also benefit from legal prohibition of coupon exchange. Thus such prohibition may reflect a dominance of bureaucratic and/or producer interest in that government decision. In the case of a shortage created by a price ceiling, three common alternatives to the prohibited price rationing are queueing, supplier favoritism and formal government rationing. Of these three, the latter is likely to have widespread political appeal if the shortage is severe and prolonged. Queueing, for example, simply substitutes a time price for that component of the market-clearing money price which consumers are forbidden to pay and is likely, in many cases, to reduce the consumer's surplus of many individuals to below that which they would achieve in the absence of the price control.1 Reliance on supplier favoritism may also be undesirable from the standpoint of many consumers, especially if the supplier is able to set up an implicit market for his 'favors' which effectively raises the price of the rationed commodity to the consumer. Formal rationing by the government eliminates both of the above sources of added costs to consumers. The government simply distributes among consumers 'rights' to purchase the rationed commodity at the regulated price. At the time of purchase of a unit of the rationed commodity, the consumer must surrender not only the money price of the commodity but