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.
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
Effect of Taxes on Supply and Demand
MarketsA price ceiling is the maximum amount a seller can charge for a product or service.
MarketsWhat does it mean when the U.S. government raises the debt ceiling? What purpose does it serve and what risks are involved raising it?
MarketsDoubling pay for hourly workers could have several knock-on effects to the economy. Here's a brief look at a big issue.
MarketsRead about the potential pros and cons of Walmart's promise to increase its minimum starting salary to $10 an hour.
RetirementAs the political debate roars on, the numbers are clear: Even two full-timers at U.S. minimum wage can't keep a family of four above the poverty line.
MarketsDiscover why the minimum wage isn't the panacea it is made out to be, and how artificial wage increases strain businesses and consumers.
MarketsMinimum wage is an essential issue for presidential candidates in the lead-up to the 2016 election. We look at the reasons why.
MarketsIt's been a few years into the economic recovery from the Great Recession, and the employment picture has been rocky.
MarketsWe explain how the minimum wage affects unemployment, public assistance, and the economy overall.
InvestingLearn more about how pharmaceutical companies price drugs, why prices are often very high and why it can be difficult to settle on a suitable price.