Relevance of Ordinal Approach in Real Life Food Consumption Pattern: An Analysis

By Pravesh Aggarwal, RGNUL

Editor’s Note: This paper deals with the relevance of the ordinal approach in real life consumption pattern of a consumer. The first part discusses the application of the ordinal approach in the rationing of the good to a consumer. In economics, rationing is an artificial restriction of demand and is done to keep price below the equilibrium (market-clearing) price determined by the process of supply and demand in an unfettered market. The next part differentiates between the Food Stamp Program and the Cash Grant Program and the author opines as to which program is better for the poor.

RATIONING OF THE GOOD TO THE CONSUMER: ORDINAL APPROACH

1.1) Introduction

Rationing of the good is the means by which government ensures equitable distribution of resources by putting a restraint on the purchase of the commodity in the market for the rich people. Rationing is the controlled distribution of scarce resources, goods, or services and it controls the size of the ration, one’s allotted portion of the resources being distributed on a particular day or at a particular time.[1] In economics, rationing is an artificial restriction of demand and is done to keep price below the equilibrium (market-clearing) price determined by the process of supply and demand in an unfettered market.[2] Thus, rationing can be complementary to price controls which can be explained through indifference curve approach.

There are two kinds of rationing done by the government to reduce consumption- price rationing and non-price rationing. By rationing, we mean exercise tax and by non-price rationing, we mean all types of control on the quantity consumed.[3] Non-price rationing could be done by giving away of coupons that would enable low-income families to obtain some good at affordable prices, which could not be possible if the prices were to increase alone. With coupon scheme, it would develop a black market for coupons, which would paradoxically increase the utility for those who are in need of that commodity by collection of more of these coupons from those who are not in need. This ensures greater marginal utility for those people who are in need of the commodity and will provide exchange of money to those who sell these coupons. For this, it is necessary for the government to encourage trading of the coupons.

The major importance of introducing rationing is to keep the price of important commodity under control, as for a necessary commodity, there will be an excessive demand in the market which will drive their price up in the market and high prices leads to reduction of consumption and utility for those who could not afford it. This ensures that the resources are planned in favor of the poor people of the country and restricting the rich people to ensure excessive purchase of limited resources of the country. This ensures development and equality of welfare and utility between the rich and the poor people. Rationing of the good is done by the government and not the private sector. There is the same limit put on every person on the budget spending to which people could buy the commodities and within the limit, one could buy any amount of the commodity.

1.1.1) Persuasive and Binding power of rationing

In many cases, Rationing of goods do not have the binding value on the consumers and it proves to be quite ineffective in restricting the consumption of a good, thereby quashing its objective of affecting the budget limit of the consumer. This persuasive value is more common for the poor people in the country where they even could not afford to the buy the rationed commodity. This annuls the importance of the rationing and reflects the importance of the income as a binding value on the consumption choice and not the ration limit. It has its binding value for the rich people which put a limit on their high consumption of goods, i.e. puts a limit on their budget.

1.2) Examples related to rationing of goods

In India, rationing of good is done by the government through public distribution system by providing food grains at a cheap rate to the people (especially poor); the same can be explained through indifference curve analysis. Due to rationing of wheat and rice in Delhi, every resident in India will get same amount of wheat and rice by using ration cards. Every month, through the use of ration cards, one could purchase 4 kg of wheat and 1 kg of rice and one family could buy 5 kg of rice, no matter how many members are there in the family. But, south Indians will get more satisfaction from rice than the wheat, and so if the rationing is done more on the purchase of rice than the wheat, then it would amount to decline in the utility to the south Indian people and  vice versa. Similarly, for the Punjabi’s living in Delhi, normally, getting more wheat gives them more utility than the purchase of rice. With the help of indifference curve, Punjabis and South Indians will be able to decide the rate at which they should exchange wheat and rice among themselves so as to get maximum satisfaction.[4] This further shows that the effect of rationing may be fruitful and provide more utility to some and not so good for the others and vice versa. Hence, Government introduces rationing of only those goods which are not in excess in the market and for which demand in the market is very high, i.e. these are very common consumer good and hence, the government introduces the rationing taking into account the balance of utility between different classes of people for the purpose of satisfying mostly every people.

1.3) Economic explanation of Rationing through Ordinal approach

1.3.1)      Rationing in one commodity

Preventive and Effective Rationing[5]

 1

In the above indifference curve, Government imposes rationing of good X at point R, i.e. beyond OR, consumption cannot be increased. Initially, for the poor consumer, equilibrium is at point P because at this point, indifference curve is tangent to the budget line and similarly, equilibrium for rich consumer at point Q. The permissible limit of X’s consumption (OR) far exceeds the equilibrium quantity of X which the poor consumer would like to purchase, rendering the rationing at OR ineffective, and calling such type of rationing as preventive rationing for poor consumer. Whereas for the rich consumer, the equilibrium point changes from point Q to point U since after rationing, rich consumer cannot purchase OM quantity of good X as it is beyond OR quantity ( rationing quantity), as a result of which Indifference curve shifts from IC2 to IC3. This type of rationing of good is effective rationing for the rich.

1.4) Conclusion

This shows that utility of the poor consumer remains the same with no downward shift in the indifference curve but the utility for the rich consumer declines with imposing restriction on the purchase of commodity X by the downward shift in the indifference curve. This rationing helps in restricting the excessive amount of purchase of important and scarce commodity X by the rich people and making it available for all in an optimum quantity.

FOOD STAMP PROGRAM VS. CASH GRANT PROGRAM: WHICH IS BETTER FOR THE POOR?

2.1) Introduction

Food Stamp program is a type of food subsidy to provide poor people with adequate quantity of food.[6] It is another form of in-kind food subsidy which is discerning from the subsidy in the form of cash income, called as cash subsidy which is provided in the cash grant program. Food Stamp program is a boon in providing nutritional assistance benefits to different classes of people i.e. families and children, unemployed people and the working families, elderly and disabled people. It solely objective is to alleviate hunger among poor people. These food stamps are available to only those people whose income lie below a certain minimum level. For e.g. In US, a person with income $400/month might be able to buy $100/month worth of food[7], and any excessive consumption from the given $100/month must be bought in for cash. The purpose of giving food stamp is to purchase only food products and not to purchase cigarettes, alcohol, and other lethal products. These food stamps are exchanged for cash by the food retailers from the government. For e.g. In US, the number of people receiving food stamps through the federal Supplemental Nutrition Assistance Program rose during the recession. The higher poverty rate, poor job market, and changes to the way applicants are evaluated have contributed to the rising ranks. In the year 2012, about 48 million people drew utility from food stamp benefits.[8]

This can be contrasted with cash grants in the sense that it provides money to the people which can be used not only in buying food but also any other commodity. So it provides a wider scope for the people on the consumption of various commodities in the market. It acts as a supplementary income to the consumer. In many cases, cash grants are given to meet the specific demand of the people, like in Massachusetts (US), The Cash Grant Program, under the Massachusetts Department for Higher education, is designed to assist needy students in meeting institutionally held charges such as mandatory fees and non-state-supported tuition. [9] This raises the utility for the people in spending according to one’s wish and desire.

2.2) Economic aspect[10]

2.2.1)   Where Food Stamp and Cash Grant yield same outcome

2

2.2.2)   Where food stamp and cash grant yield different outcomes

 3

When the cash grant of $100 is given to the consumer, there will be shift bin the budget line to EA. But unlike food stamp policy, the consumer is not restricted to buy at least $100 on food, and instead he could distribute his income among food and other goods in such a way so as to give a maximum possible satisfaction. Hence, the consumer, instead of choosing indifference curve IC2 will choose IC3, which lies on a higher level than IC2 and thus giving greater level of satisfaction to the consumer. In this case, the consumer purchases lesser quantity of food than in case of food stamp.

2.3) Conclusion and Practical relevance for both the Graphs

In the first graph, the consumer, on being given food stamp and cash grant, buys not only more quantity of food but also more quantity of the other goods. This shows that food subsidy, in addition to giving up of more satisfaction or welfare to the consumer, has led to consumption of greater quantity of food and other goods. This shows the indirect financing done by the food subsidy in the consumption of non-food products.

In the second graph, the consumers on being provided food stamps and cash grants increase the purchase of both the food and other goods than before these were given. This is because both of these goods are normal good and their consumption escalates with increase in income of the consumer. In addition, since some amount of money was released on the purchase of food quantity on account of giving up of subsidies, that money could be spent on the purchase of non-food products, which increases their consumption. This has been a major controversy regarding giving of taxes by the rich for the purpose of giving food stamp to the poor for their sustenance through the government, since they argue that the same should not be used for purchasing other commodity (and sometimes wasteful commodities like liquor) but in practice, it is not possible to give subsidized food without the purchase of other goods, as shown through the ordinal approach above.

Moreover, in the above case, the consumer gets more amount of satisfaction from the cash grant given to him than that which he gets from food stamp whereas the purchase of food items is more in case of food stamps than cash subsidy. Thus, in-kind food subsidy provided in food stamp programme is inferior to cash subsidy because of the fact that the cash subsidy do not impose any restriction that he must buy a minimum of certain quantity of food and he is free to spend his income as he wishes. But, in case the government wants to increase the consumption of food among the people and thereby, provide an adequate diet to the people, then food stamp subsidy proves to be fruitful than cash subsidy.

The Congress government in US has been giving food subsidy to the poor people in order to help these people buy food, not luxury items or wasteful items like cigarette, and alcohol. It thereby helps in subsidizing agriculture, by forcing the poor to purchase food commodities. This is clearly from the purchase requirements before 1979 in US, in which food stamp receiving people got $150 worth of food stamps by the payment of just $50 and the remaining amount was to be paid by the government to the farmers. This raises the demand of food products also and helps in increasing the sale of food products and income of the farmers.

But, with the giving of food stamp subsidy, the people could engage in black market for the purchase of other commodities like liquor, etc. through the use of food stamps. In addition, the utility to the consumer by providing cash grant is more than providing food stamp subsidy.

However, in practical sense, food subsidy is more important for the provision of unrealized welfare to the poor people than the cash subsidy.

The concept of gift giving- There are types of in-kind subsidies like gift giving (not money). Though, the cash transfer results in purchase of commodities according to one’s utility and the donor often miss the mark of providing useful gifts for some other person to meet his utility, even then this trend is prevalent in present world mainly because of two aspects. One purpose is to provide affection for the recipient which a gift of cash cannot provide.[11] Another reason could be that it helps people’s satisfaction of small luxuries of life since people only bother about purely practical items in the modern world. So, it provides a medium of enjoying small luxuries of life without having to feel guilty about it.

Edited by Hariharan Kumar

[1]       Surhone, Lambert M., Marriam T. Tennoe, and Sunsan F. Henssonnow. Rationing. New York: Betascript Publishing, 2011. Print.

[2]       Ibid.

[3]       G.S. Maddala. Microeconomics: Theory And Applications. New Delhi: Tata McGraw-Hill Education, 2004. Print.

[4]       T.R. Jain. Microeconomics and Basic Mathematics. New Delhi: V.K. Publication, 2006. Print.

[5]       H.L. Ahuja. Advanced Economic Theory: Microeconomic analysis. 17th ed. New Delhi: S. Chand and Company Ltd., 1970. Print.

[6]       H.L. Ahuja. Advanced Economic Theory: Microeconomic analysis. 17th ed. New Delhi: S. Chand and Company Ltd., 1970. Print.

[7]       Robert H. Frank. Microeconomics and Behaviour. New York: McGraw-Hill Education, 1991. Print.

[8] House Passes Bill to Cut Food-Stamp Spending, Wall Street Journal, available at http://online.wsj.com/news/articles/SB10001424127887323808204579085690494385608.

[9]       Massachusetts Department of Higher Education.Office of student financial assistance, 2013. Web. 10 Oct. 2013.

[10]     H.L. Ahuja. Advanced Economic Theory: Microeconomic analysis. 17th ed. New Delhi: S. Chand and Company Ltd., 1970. Print.

[11]     See Surhone, Lambert M., Marriam T. Tennoe, Sunsan F. Henssonnow. Rationing. New York: Betascript Publishing, 2011.

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