Estimating the Welfare Effect of Rationing

Ensuring access to essential goods during hard times has always been the policy makers’ main concern. Using Household Expenditure and Income Survey data during 1984-1989, we estimate the welfare effects of rationing three essential goods: rice, cooking oil, and sugar. We find that households consumed higher than the efficient quantities of these rationed goods due to lower prices. Under the alternative policy of a cash transfer equal to the value of rations, we estimate a small increase in the aggregate welfare. The distribution of this overall small welfare gain is skewed toward the poor households. The welfare of the poorest quintile of households increases by more than 5 percent when cash transfers replace rationing.