FACTOR SUPPLY INTERRUPTION, WELFARE LOSS AND SHORTAGE MANAGEMENT

Factor supply shortage is a common problem faced by a firm. Solutions for allocating the limited supply include rationing, interruption and pricing. While previous research has examined the welfare losses gener ated by each solution, there is little evidence on their relative magn itudes within a common framework. The objective of this paper is to sp ecify a model of firm behaviour under service interruption to estimate the welfare loss of service interruption. The same model is used to e stimate the loss due to a price increase intended to resolve a supply shortage. Using water consumption data collected for Hong Kong, we fin d that relative to pricing, service interruption is inefficient for wa ter shortage management.