(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 124

CHAPTER 3 • Consumer Behavior 99

Spending
on other
goods ($)

A

F IGURE 3.22

20,000
18,000

INEFFICIENCY OF GASOLINE
RATIONING

D
C

15,000

U2
U1
E
0

2000

B
5000

20,000

Gasoline (gallons per year)

gasoline. Suppose the controlled gasoline price is $1 per gallon. Because her
income is $20,000, she is limited to the points on budget line AB, which has a
slope of −1. Point A represents her total income of $20,000. (If no gasoline were
purchased, she would have $20,000 to spend on other goods.) At point B she
would be spending her entire income on gasoline. At $1 per gallon, she might
wish to buy 5000 gallons of gasoline per year and spend $15,000 on other goods,
represented by C. At this point, she would have maximized her utility (by being
on the highest possible indifference curve U2), given her budget constraint of
$20,000.
Let’s assume that with rationing, our consumer can purchase up to a maximum of 2000 gallons of gasoline. Thus, she now faces budget line ADE, which is
not a straight line because purchases above 2000 gallons are not possible. Point
D represents the point of consumption of 2000 gallons per year. At that point,
the budget line become vertical, declining to point E, since rationing has limited gasoline consumption. The figure shows that her choice to consume at D
involves a lower level of utility, U1, than would be achieved without rationing,
U2, because she is consuming less gasoline and more of other goods than she
would otherwise prefer.
It is clear that at the rationed price the woman would be better off if her consumption were not constrained. But is she better off under a rationing system
than she would be if there were no rationing at all? The answer, not surprisingly,
depends on what the competitive market price of gasoline would have been
without rationing. Figure 3.23 illustrates this point. Recall that had the price
of gasoline been determined by the market to be $1 per gallon, our consumer
would have been able to buy up to 20,000 gallons of gasoline per year—hence the
original budget line. With rationing, she chooses to buy the maximum allowable
2000 gallons per year, putting her on indifference curve U1. Now suppose that
the competitive market price had been $2.00 per gallon rather than $1.00. Now
the relevant budget line would be the line that was associated with a maximum

gasoline consumption of only 10,000 gallons per year, and with no rationing she

When a good is rationed, less is
available than consumers would like
to buy. Consumers may be worse
off. Without gasoline rationing, up
to 20,000 gallons of gasoline are
available for consumption (at point
B). The consumer chooses point C
on indifference curve U2, consuming
5000 gallons of gasoline. However,
with a limit of 2000 gallons of gasoline under rationing (at point E), the
consumer moves to D on the lower
indifference curve U1.