Black markets are associated with: A price floors and the resulting product surpluses. B price floors and the resulting product shortages. C price ceilings and the resulting product shortages. D price ceilings and the resulting product surpluses.
The correct answer and explanation is:
Correct Answer: C) Price ceilings and the resulting product shortages.
Explanation:
Black markets often arise in situations where government-imposed price controls disrupt the natural equilibrium of supply and demand. The correct answer, C, connects black markets to price ceilings and the resulting product shortages. Here’s how:
What Are Price Ceilings?
A price ceiling is a government-imposed limit on how high a price can be charged for a product or service. The goal is typically to make essential goods or services, such as housing or food, more affordable for consumers. For example, rent controls are a common form of price ceiling.
Impact of Price Ceilings
When a price ceiling is set below the market equilibrium price, two significant outcomes occur:
- Shortages: Producers are less willing to supply goods at the lower, non-competitive price, while consumers are more eager to purchase them at the artificially reduced cost. This leads to a supply-demand mismatch, where the quantity demanded exceeds the quantity supplied.
- Inefficient Allocation: The limited supply often fails to reach the consumers who need it most. This encourages non-market-based behaviors such as favoritism, long queues, or corruption.
How Black Markets Form
Black markets emerge as individuals or groups exploit the scarcity caused by shortages. Sellers offer the product at prices above the ceiling, catering to those willing to pay more. For example, in cases of rent control, some landlords might accept illegal “under-the-table” payments from tenants to secure housing.
Why Not Price Floors?
Price floors, which set a minimum price (e.g., minimum wage laws), generally lead to surpluses rather than shortages, as seen in the case of unsold goods or unemployment. Black markets are less likely to form in such scenarios because there is no scarcity to exploit.
In summary, black markets are strongly linked to price ceilings because they incentivize illegal sales to counteract shortages, making the correct answer C.