Informal or illegal markets can be the result of____
A Lack of government price ceilings or price floors,
B The removal of price controls
C Government imposed speed limits on Interstate highways
D Government imposed price ceilings or price floors
The correct answer and explanation is:
The correct answer is B) The removal of price controls.
Informal or illegal markets often emerge when there is a lack of government intervention in setting price controls, such as price ceilings or price floors. Price controls are typically implemented by governments to regulate the maximum or minimum price at which goods or services can be sold.
When the government removes these price controls, there can be an imbalance in the market, leading to the creation of informal or illegal markets. For instance, without price ceilings, sellers might increase prices beyond what consumers can afford, prompting the demand for cheaper, unregulated alternatives in the informal sector. Similarly, when price floors (minimum prices) are removed, sellers may lower prices below the legal minimum, causing the emergence of unregulated, illegal markets where products are sold at substandard prices.
For example, if a government removes price controls on rent, landlords could charge higher prices than what the market would bear, causing some renters to seek housing in the informal sector. In some cases, the lack of regulation might also incentivize black-market activity, where goods like pharmaceuticals or consumer electronics are sold without proper oversight, increasing the risk of fraud and unsafe products.
On the other hand, government-imposed price ceilings (maximum price limits) and price floors (minimum price limits) aim to prevent extreme price fluctuations, either protecting consumers from price gouging or ensuring that producers receive fair compensation. However, the removal of these controls can disrupt the market equilibrium, pushing buyers and sellers into informal, unregulated exchanges to meet their needs.
Therefore, the lack of price controls (option B) creates conditions where informal markets can thrive due to the absence of regulatory boundaries.