Figure 5-3 illustrates the extreme case, in which all the available supply
is sold on a black market. We say this case is extreme because there are
law-abiding people in every society and because governments ordinarily
have at least some power to enforce their price ceilings. Although some
units of a product subject to a binding price ceiling will be sold on the
black market, it is unlikely that all of that product will be.
Does the existence of a black market mean that the goals sought by
imposing price ceilings have been thwarted? The answer depends on
what the goals are. Three common goals that governments have when
imposing price ceilings are:
1. To restrict production (perhaps to release resources for other
uses, such as wartime military production)
2. To keep specific prices down
3. To satisfy notions of equity in the consumption of a product that
is temporarily in short supply (such as building supplies
immediately following a natural disaster)When price ceilings are accompanied by a significant black market, it is
not clear that any of these objectives are achieved. First, if producers are
willing to sell (illegally) at prices above the price ceiling, nothing restricts
them to the level of output of in Figure 5-3. As long as they can
receive a price above they have an incentive to increase their
production. Second, black markets clearly frustrate the second objective
since the actual prices are not kept down; if quantity supplied remains
below then the black-market price will be higher than the free-market
Q 2
p 1 ,Q 0 ,