Question

If a price ceiling or price floor existed where you lived, would you be willing to purchase products on the black market? What would you identify as a consequence to engaging in transactions on the black market over the short run and the long run?

Answer 1

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of outputs.

So when the price floor is set above the equilibrium price, only then it is effective but when it is set either below the equilibrium price or at the equilibrium price, then it will be ineffective. So there will be no unintended inventory and market gets cleared.

The price ceiling is a legal maximum price which can be charged by the sellers and it is set below the equilibrium price. The price ceiling imposed by the government leads shortage of goods.

If price ceiling is set below the equilibrium price, then it will be binding and if it is set above the equilibrium price, then it will be not binding.

If there is price ceiling, then there will be shortage of goods and when there is price floor, then there will be surplus quantity. Hence this leads to emergence of black market. There will be black market only in short-run but in the long-run there will be no black marketing because in long-run according to shortage or surplus the quantity demand or quantity supply will change but in short-run it is not possible completely.

This is because in short-run consumer cannot change his taste and preference but in long-run it is possible. Similarly in short-run producer cannot increase change supply but in long-run it is possible.