Managing Congestion: Economics of Price and Lottery Rationing

It is not uncommon for the carrying capacity for congestible facilities to be estimated before the allocation method is known. This paper shows how efficient capacity differs between two competing resource allocation mechanisms, one which is efficient (price) and one which is fair (lottery). The welfare theoretic implications of adopting lottery allocation rather than price allocation are illustrated from the perspectives of economic efficiency and the benefits obtained by resource users and suppliers. It is found that risk-neutral resource users will always prefer lottery allocation to price allocation. While price allocation is efficient, it is never in risk-neutral resource users» interests to have price allocation imposed. Conclusions are tested using a linear constant crowding demand function, in which case it is found that the efficient capacity for lottery rationing exceeds the efficient capacity where price is to be used to allocate a congestible resource. Objectives may be better met by joint use of allocation mechanisms, the implications of which are investigated using the linear demand model.