Managing the demand side of a sudden supply shortage: Some policy alternatives when information is costly

Abstract

Three alternatives for managing the demand side welfare impact of an unanticipated supply shortage in a crucial commodity are compared under uncertain demand and costly information. A tax handles uncertainty best, but is costly to compute and produces the same high price as laissez faire. A rationing scheme set to match expected consumption levels produced by the tax is also expensive to compute, but it is best among quotas. Arbitrary coupon quotas cum white markets are more easily set, and they achieve ultimate consumption distributions identical, in expected value, to the best quota. There is a distributional cost associated with the coupon market, though, and its size depends upon the size of the error made in setting the initial coupon allocation.