The Economics of Welfare

Pigou, Arthur C.
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First Pub. Date
London: Macmillan and Co.
Pub. Date
4th edition.
63 of 73

Part IV, Chapter VI


§ 1. IN Chapter XIII. of Part II. some discussion was undertaken of the policy of rationing, as an adjunct to State control over the prices of commodities produced under competitive conditions. A brief study of this policy is now required from another point of view. The rationing of essential commodities to the better-to-do classes, whether coupled or not with price control, may be advocated as a means of ensuring that sufficient supplies at reasonable prices shall be available for the poor. Prima facie it would seem that this policy may affect the size of national dividend in one way and the absolute share of it accruing to the poor in another, thus involving disharmony. The question whether or not this is in fact so will be examined in the present chapter.


§ 2. In the special emergency of the Great War, supplies of certain things were short as a result of causes which could not have been got over, whatever prices sellers had been allowed to charge. Price regulation and rationing did not, therefore, as was argued in Part II. Chapters XII. and XIII., substantially reduce the size of the national dividend. At the same time they jointly saved the poor from a disaster that could not otherwise have been avoided. The grant of large bonuses on wages would not have enabled poor people to obtain essential articles of which the supply was short and the demand of the rich inelastic. The prices of these things would, indeed, have been forced up, but the rich, at the cost of paying more money, would still have obtained as much as before out of the shortened supply, and would have correspondingly cut down the share available for the poor. Thus the poor would have suffered enormously in respect of real income, even though their money income had risen proportionately to the rise in general prices, because particular things of vital importance to them would have been practically unobtainable. Moreover, the fixing of maximum prices without rationing would not have been sufficient; for the presumption is that the rich, by various pulls, would still have skimmed the market. From the joint facts that in the war price control coupled with rationing did not injure production and did benefit distribution it has sometimes been inferred that the same policy continued in normal conditions would produce the same harmoniously beneficial result. That is the issue we have to judge.


§ 3. In attempting to elucidate it we have to make clear, from the present point of view, the relation between rationing and price-fixing. Clearly in a brief period of shortage it is possible, with a given system of rations, to have any one of a large number of regulated price maxima, because, for the time being, the output and (within limits) the amount offered for sale are independent of the price. But, when we are contemplating a policy for normal times, the position is different. Suppose, first, that a given scale of rations is established unaccompanied by any price restriction, and that everybody is purchasing the whole of the ration to which he is entitled. This implies a definite quantity demanded; and there is, in general, only one price that will call out this quantity. If the State fixes a maximum price higher than this, the sellers will not be able to realise it, and the maximum price will become otiose. If, on the other hand, the State fixes a price less than this, not enough will be produced to enable everybody to get his ration: and, consequently, if the rations are to be effective, in the sense that whoever wants his allotted ration can obtain it, the whole ration scale will have to be altered to fit the new price. Suppose, secondly, that a given ration scale is established, but that, while the scale limits the purchases of some people, others are buying less than their ration allowance. As before, to whatever aggregate quantity is being purchased there corresponds one single price that will call out that quantity; and, as before, if the State fixes a maximum price higher than this, the maximum will become otiose. If the State fixes a maximum lower than this, it seems at first sight that a new equilibrium may be established, in which some of those now buying less than their ration will buy the full amount. But, in fact, the lower price must mean a lower output, so that nobody can buy more, or even as much as before, unless others buy less. It must happen, therefore, that some of those who before were purchasing their full ration are now unable, although they still wish, to do so. Here again, therefore, the ration scale becomes ineffective, and a new and lower ration must be established to fit the new price. Hence, generally, to any effective ration scale only one price level can correspond; and it is impossible for the State to establish any other price level without at the same time establishing another effective ration scale. This conclusion is a very important one for my present purpose: because it makes it unnecessary to study both rationing by itself and also rationing accompanied by price regulation. The two things work out, when the numerical constants are adjusted, in exactly the same way; and the whole problem is exhausted when the consequences of rationing alone have been examined.


§ 4. It is evident that any rationing system, which aims at benefiting the poor, must be so designed as to cut down the consumption of the rich. Such facts as that, for example, a uniform bread ration on a scale tolerable to the poor would not accomplish this, because, normally, poor people eat more bread per head than rich people, are not really relevant. We are not concerned here with technique, but with principle; and any rationing scheme, that pretends to increase the supplies available for the poor as a body, must be so devised—the scale need not, of course, be uniform—that it cuts down those available for the rich. So much being understood, our analysis of rationing in normal times may proceed. It works out differently for commodities produced under conditions of decreasing supply price and of increasing supply price.


§ 5. With decreasing supply price from the standpoint of the industry, the ultimate consequence of extruding from the market a part of the demand of the relatively well-to-do is necessarily to contract the production of the commodity and, therefore, since, as was shown in Part II. Chapter XI., too little of it is being produced anyhow,—for decreasing supply price from the standpoint of the industry usually implies also decreasing supply price from the standpoint of the community—to lessen the national dividend. At the same time the rise in price, which a diminution in the supply of an article produced under conditions of decreasing supply price must involve, forces poor people both to buy less of the commodity than they would have done and also to pay more for what they do buy. Thus they are unequivocally damaged. The aggregate dividend and their share of it alike suffer, and disharmony is impossible.


§ 6. With increasing supply price from the standpoint of the industry the extrusion of part of the demand again, of course, contracts the production of the commodity. If the conditions are such that increasing supply price from the standpoint of the industry implies constant supply price from the standpoint of the community, the amount of production that would take place in the absence of interference will be the right amount to maximise the national dividend, and an enforced contraction in it will lessen the national dividend. If, on the other hand, the conditions are such that increasing supply price from the standpoint of the industry implies also increasing supply price from the standpoint of the community, the amount of production that would take place in the absence of interference will—as was shown in Part II. Chapter XI.—be too large to maximise the national dividend, and an enforced contraction in it will, if it does not go beyond a certain definite limit, benefit, and not injure, the national dividend. In either event the price of the commodity will be reduced, so that the poor probably get more of it, and certainly get it at a lower price. Hence the poor must gain. In the second case distinguished above, therefore, if the slice cut off the demand of the rich is not too large, there is harmony of an opposite sort to that which comes about under decreasing supply price; the national dividend and the slice accruing to the poor are both increased. But, if the check to the purchases of the rich is pressed beyond a certain point, there is disharmony, the poor still getting a benefit but the national dividend as a whole suffering loss. In the first case distinguished above there is disharmony of this sort whatever the size of the check to the purchases of the rich.


§ 7. This analysis makes it plain that conditions may exist in which a system of rationing in normal times, if conducted with perfect skill and without any friction, would yield a net social benefit. It does not prove, however, that in practice the rationing of any commodity is in normal times desirable. Not only is the skill of government officials limited, but also a large adverse balance of inconvenience and irritation would have to be neutralised before any positive advantage could begin. Moreover, it must be remembered that, since the rich are relatively few in number, and their consumption of common articles—with the exception of coal, the consumption of which is regulated by the size of a man's house and not by his bodily capacity—a small proportion of the whole, a very large percentage cut in their per capita purchases would involve only a very small percentage cut in the consumption of the country as a whole, and an almost negligible cut, for most things, in the consumption of the world. In general, therefore, its effect in cheapening the supplies to poor persons of articles of increasing supply price would be scarcely perceptible. The practical conclusion seems to be that, while it may redound slightly to the general interest for well-to-do persons voluntarily to restrict their purchases of these articles, yet, in the present state of economic knowledge and administrative efficiency, it would, in ordinary times, do more harm than good for the State to force them to do this by any system of compulsory rationing.*54

Notes for this chapter

It must be remembered, however, that, if only 500 rich men cut down their consumption of this type of article in a given proportion, the benefit to the poor will be less than half what it would have been had 1000 done so; because what one rich man voluntarily refrains from consuming another rich man, tempted by the resultant lowering of price, may be tempted to bid for. This is, pro tanto, an argument for compulsory (and, therefore, universal), as against voluntary, rationing.

Part IV, Chapter VII

End of Notes

63 of 73

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