Rizzo started class by saying that the reason why people have to ration things is that there isn’t enough for everyone. There may only be 3 fish that 5 people want so how do we ration this.
Sample Rationing Criteria
1.need
2. Queue
3. Lottery
4. Equal Shares
5. Might makes right
6. Merit-beauty? Smarts?
Evaluation of Rationing Mechanisms
1. Where does competition come from
2. What is the nature of competition. (can be constructive or destructive)
3.What are incentives for producers to make/deliver more?
4.Other considerations
What other customers are willing to pay for your product is also an opportunity cost.
In Rizzo’s Masters story, the hotel increased its price by $200 for this event knowing that hotel rooms were scarce at this time so people would be willing to pay for it. The price that a business can charge you is the price everyone’s willing pay. It shows value that others put on that hotel room.
Rizzo economized because of this to share other rooms with strangers and got 1 room for him a friend a his brother to share rather than 3 rooms where each person got their own room.
Without increasing the price this much for the 1 week masters event, the hotel would have to make the normal price $100 instead of $79 because they know that they’ll make enough extra during the masters that they can offer prices the rest of the year.
The price system is a rule we follow to allow 5 fish to get to 12 people. More people need health care than can actually pay. This is how they ration. There is not enough health care for everyone.
Some questions to think about on rationing for need where the person who needs it the most gets it first is who is needy? What does needy mean? There is no universal criteria for need. We can’t know how many people need. How do people compete in this world. Determining need is very costly. No way to ensure that people who need something will get it.
Queing- first come first serve. We see lines for goods. When prices are cheap, long lines can push us away from standing. People show willingness to pay by standing in line.
When we ration by a lottery, black markets develop from this.
If we ration by equal shares it is communism. Reduces value for everyone.
Might makes right- fight for fish. It is costly for everyone and planning is difficult. We can’t plan with this.
Merit- Not possible to decide it outside of small circles. Merit says nothing about value of achievement. Can’t reward all merit justly. Merit means nothing. Societies who act for merit are opposite of free society. Act on duty rather than success.
Competition doesn’t come from rationing mechanism but from scarcity. We compete because things are scarce and we want them. It matters if competition is destructive or constructive. Price system is constructive. Need, queue, lottery, equal shares, might, merit are destructive. Destructive competition wastes time that someone could be producing something non productive. Less for society. Isn’t zero sum but negative sum. At least price system is constructive for people who argue against it. Adds value to society to get something. With a big economy, you can’t do destructive rationing. No incentive to supplier to bring something for chance to use income. Comes from price system. Rationing by need makes people act poorer.
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