Price Ceilings
If the price ceiling is above the market price, then there is no direct effect. If the price ceiling is set below the market price, then a "shortage" is created; the quantity demanded will exceed the quantity supplied. The shortage may be resolved in many ways. One way is "queuing"; people have to wait in line for the product, and only those willing to wait in line for the product will actually get it. Sellers might provide the product only to family and friends, or those willing to pay extra "under the table". Another effect may be that sellers will lower the quality of the good sold. "Black markets" tend to be created by price ceilings.

Figure 3.6: Effect of Price Ceilings

Figure 3.6 illustrates the shortage that occurs when a price ceiling is imposed on suppliers. Consumers demand QD while Suppliers are only willing to supply QS. If the price ceiling is set above the equilibrium, consumers would demand a smaller quantity than suppliers are producing.

Economic Efficiency: Black Vs. Legal Markets
Legal systems provide various benefits to economic systems.

Economic efficiency may be said to occur when an action creates more benefits than costs. Legal systems help economic systems become more efficient by reducing risks to economics participants. Risk represents a cost that must be compensated for by higher charges.

One risk reduced by government regulation is theft. Government protects the property rights of owners so that they can benefit from the assets they own and use them in an efficient, economic manner. Participants in a "black market system" face a high risk of theft in their transactions as well as exposure to other forms of violence.

Governments often also provide a regulatory framework for the safety of products. In a market operating within a legal system, purchasers of drugs have a reasonable expectation about the quality of the drugs and the expected benefits of the drugs. Participants in a black market for drugs will have incomplete information about the quality of drugs purchased and, therefore, appropriate decisions are more difficult to make.

Price Floors
When a "price floor" is set, a certain minimum amount must be paid for a good or service. If the price floor is below a market price, no direct effect occurs. If the market price is lower than the price floor, then a surplus will be generated. Minimum wage laws are good examples of price floors. In many states, the U.S. minimum wage law has no effect, as market wage rates for low-skilled workers are above the U.S. minimum wage rate. In states where the minimum wage is above the market wage rate, the law will increase unemployment for low-skilled workers. Although some low-skilled workers will get higher pay, others will lose their jobs.

Effect of Taxes on Supply and Demand

Related Articles
  1. Personal Finance

    Should Congress Raise The Debt Ceiling?

    Some members of Congress say the debt ceiling must be raised while others insist it's time Uncle Sam learned how to get by without any more borrowing. We'll look at the issues at stake.
  2. Personal Finance

    Fiscal Responsibility and the Federal Debt Ceiling

    Is the United States headed for another partial government shutdown on October 1?
  3. Personal Finance

    What Is Your Financial Services Business Worth?

    Understanding how much your practice is worth can help you make decisions about whether or not to sell the practice.
  4. Insights

    The Mechanics Of The Black Market

    Black markets will continue to exist as long as we have regulations and taxes. Discover how they work.
  5. Insights

    The Big Business Of Black Markets

    Black markets are alive and kicking in all corners of the world, sometimes in plain view. And they are big business.
  6. Insights

    Why Minimum Wage Is a Kingmaking Issue in Elections

    Minimum wage is an essential issue for presidential candidates in the lead-up to the 2016 election. We look at the reasons why.
  7. Insights

    What Are the Pros and Cons of Raising the Minimum Wage?

    With the debate on wages continuing in Congress and in the public arena, here are some of the major pros and cons of raising the minimum wage.
  8. Personal Finance

    Electrifying Apartment Bills: How To Reduce Them

    As a renter, there are still factors that can influence your heating and air conditioning bill.
  9. Insights

    Why $15 Minimum Wage Might Not Be Good News for Anyone (MCD, DPZ)

    Discover why the minimum wage isn't the panacea it is made out to be, and how artificial wage increases strain businesses and consumers.
  10. Personal Finance

    How Minimum Wage Impacts Unemployment

    We explain how the minimum wage affects unemployment, public assistance, and the economy overall.
Frequently Asked Questions
  1. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
  2. How did moral hazard contribute to the 2008 financial crisis?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ...
  3. Which mutual funds made money in 2008?

    Read about the only mutual fund that turned a profit in 2008. Learn about risk-averse investment strategies and the financial ...
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center