maximum prices and black markets

Black markets often thrive when the government introduces price controls to affect the normal workings of the free-market price mechanism.

An example of this might be the imposition of maximum rents into the market for rented housing. For the maximum price to be effective, the price ceiling has to be set below the free-market equilibrium price.

The effect of this is shown in the diagram below which shows the introduction of a maximum rent for properties within a local market

Without any government intervention, the market-clearing rent level if £70 per week. The local authority may decide that the maximum rent should be below that figure at £50. This maximum price is a price ceiling which cannot legally be exceeded. The effect is to create a disequilibrium in the market when demand for rented properties exceeds supply. Demand expands to Q2 but the available supply of properties contracts to Q3. Therefore there is excess demand equal to Q2-Q3

Market supply contracts because some landlords are not prepared to let out their properties at the lower weekly rent level. demand expands because potential consumers will be attracted by the fall in the cost of rented accommodation.

Black Markets may develop

Market supply is now at Q3- how does the market adjust to this disequilibrium? A black market is one possibility because some consumers are willing to pay much more than £70 per week for their rented property. Their willingness to pay is shown by the elasticity of the demand curve. A black market may develop where these consumers negotiate with landlords to pay a higher price in other ways than a simple weekly rent. This informal market is likely to flourish unless the authorities are able to identify and penalise people involved in this "trading"

Black markets are a common feature of most economies throughout the world. We tend to see them most frequently when demand for tickets at major sporting occasions exceed the supply. This suggests that the price has been set below the equilibrium.

Minimum Prices - the National Minimum Wage

A minimum price is a price floor below that the free market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price. A good example of this is minimum wage legislation.

If the minimum wage is set at W, there will be an excess supply of labour equal to Q2-Q1. This means that there will be unemployment in the labour market. While the minimum wage may raise earnings for those in employment it clearly has a negative impact on the level of unemployment.

Minimum and maximum prices illustrate how changes price and quantity can be brought about without a change in either the conditions of demand or supply.

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maximum prices and black markets

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