Applied Fairness Theory and Rationing Policy

In the past few years, several economists, notably Duncan Foley, Hal Varian, E. A. Pazner and David Schmeidler, have produced a novel analytical theory of fairness in the distribution of resources, in contradistinction to the efficiency of their allocation. This work is primarily philosophical in orientation, being concerned primarily with the logical underpinnings of an analysis of fair division, rather than with its application. Here, I offer a nontechnical introduction to the subject, providing a few new results about the construction. But this is only a preliminary to an attempt to show how fairness theory can be used to study policy, employing the issue of rationing of commodities as an illustration. Persons who design public policy are, typically, at least as concerned with issues of equity as with allocative efficiency. The economist's influence is therefore impeded by his inability to deal with issues of fairness in applied problems. Fairness theory, perhaps for the first time, provides an analytic instrument for the purpose. Inevitably, it must, of course, rest upon value judgments as well as observable relationships. But what is remarkable about fairness theory is that both the behavioral relationships and the value judgments on which it is based are, essentially, those used in the standard welfare analysis of resource allocation. In both, the basic data are consumer preferences and production relationships, and in both the basic value judgment is that the desires of the affected individuals, rather than those of some superior arbitrator, must count. Our illustrative policy issue-the rationing of commodities-has reemerged with the fuel problem. Here, I will examine the choice between two points-rationing arrangements, under which consumers are each issued a fixed number of ration points, redeemable at a fixed "points price," Pg, per gallon of gasoline, or at another coupon price, P*h per gallon of heating oil, etc. The consumer is thereby subjected to a second budget constraint expressed in ration points rather than money. Economists have suggested that the efficiency of such a rationing system can be improved if it is accompanied by a "white market," in which consumers with unwanted ration coupons can sell them to others at a market-clearing (money) price. I will show that while there is a valid efficiency argument favoring the white market arrangement over one in which the sale of ration coupons is prohibited, fairness analysis yields a presumption that goes the other way. This may provide some justification for the apparently widespread suspicion of the fairness of white markets among noneconomists.