Transcript Price Controls & Black Market Economies

Price Controls &
Black Market Economies
Price Controls
• Why Implement Price Controls?
– The government feels that the forces of
supply and demand are resulting in
equilibrium prices that are either:
• Unfairly high for buyers
• Unfairly low for sellers
• Equilibrium Price - The price where the
quantity demanded and the quantity supplied
are equal.
Price Controls cont.
• Price Ceilings - The maximum legal price a seller
can charge for a good that is below equilibrium price.
– Rationale - Allows consumers to obtain some “essential”
good/service that they would not otherwise be able to
afford at the equilibrium price.
– Ex. Rent Control
• Price Floors - A minimum price established by the
government that is above the equilibrium price.
– Ex. Minimum wage
What is a black market?
• Black Markets - A market consisting of all
commerce on which applicable taxes or
regulations are avoided.
– A black market can consist of either…
• Legal goods sold at illegal prices
• Illegal goods
How do price ceilings lead
to black markets?
• Effects of Price Ceilings:
– Demand by consumers will increase;
– Seller’s profits decrease;
– In order to maximize profits, sellers will reduce
supply;
– Shortages result;
– Consumers who are willing and able to pay a
higher price for the good will find a way to obtain
it on the black market.
Black Markets cont…
• How do black markets affect the supply of
goods?
– Consumers who are willing/able to pay will move
into the black market;
– Demand for the good will increase along with the
black market price;
– Sellers will divert more of the product onto the
black market in order to make more money;
– Shortages will be exacerbated in the legal market.