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CHAPTER • 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 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
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