Method for limiting the purchase or usage of an item when the quantity demanded of the item exceeds the quantity available at a specific price.The key thing to take away from this definition is that the quantity demanded exceeds the quantity available (I'll get to price later). When this condition holds there is no alternative but to invent mechanisms to determine who gets the limited supply of goods. A simple example:
100 people want apples
There are only 50 apples
If this is the situation then one thing is clear, someone won't get as many apples as he wants. For you extra nerdy folks out there, it's the reverse pigeonhole principle (100 pigeonholes, 50 pigeons, some boxes will be empty). There are only two solutions to this problem: One is to increase the number of apples so that everyone who wants one can get one; another is to reduce how many apples are desired (I vote for shooting people).
Let's focus on the demand side since that's where rationing comes into play. Rationing is a general term for the method we choose for determining who gets the 50 apples. We could use their ages, how good looking they are, if they go to church, if they don't go to church, how hungry they are, or any other criteria to determine who gets an apple. When government rations it chooses the criteria and it makes the decisions. Now here's the important point, the free market rations too. The free market causes people to self ration based on price. People who have the money and are willing to pay for an apple, get an apple, otherwise they don't.
Rationing is a result not of the government or the free market but of the real situation. There is excess demand compared to supply. The fact that a price on something exists implies that something is limited in supply. Prices are the free market's mechanism which causes people to self ration. People reduce their demand in proportion with the price. What happens when you don't allow the price to fluctuate? Self rationing is replaced by another kind of rationing. A shortage is a form of rationing known as first come, first serve. Another form of rationing is explicit rationing by the government determining who is deserving and who is not. There are many other variations on this theme.
Rationing in and of itself is neither a good thing or a bad thing. The pricing mechanism of the free market is by far the most efficient mechanism for rationing. We should work within that system, not try to destroy it.