Price Rigidity and Quantity Rationing Rules Under Stochastic Water Supply

When the quantity of water available falls short of “normal” water supply, the typical response of municipalities is to impose some form of rationing. Although economically efficient measures such as raising prices or issuing transferable ration coupons have been advocated, they are seldom implemented. Yet the economic efficiency implications of rationing have not been analyzed in the context of stochastic supplies. In this paper, two forms of quantity rationing are proposed and the long‐run prices which maximize the expected net benefits are derived with only the knowledge of the demand distribution.