Question

2. Assume that there is a poor country, Country Z. In Z, the government buys ducks from the farmer and provides the ducks to the shopkeeper. The shopkeeper just asks the government for more ducks whenever he or she is sold out. The consumer buys ducks to eat.   Ducks are a staple food in this country but they are expensive at $3 each. The government wants to make food cheap for the urban poor to alleviate hunger. They calculate people could afford ducks if they were priced at $1. The government decides to impose a price ceiling of $1; $1 is now the maximum retail price for ducks. Now, assume that the shopkeeper only has one duck which is bought by a consumer. The shopkeeper requests more ducks from the government. The government goes to the farmer.

What happens if the farmer refuses to sell ducks at $1 each?  

What happens if the government subsidizes the ducks for the farmers? What price will farmers sell the ducks? What will be the price that the shopkeeper will charge the consumer?

Can you see a black market arising in this economy? What will the black market look like?

Answer 1

If the farmers refused to sell the Ducks to the government, then the government have to buy the ducks at 3$ from the farmers which was the original price and the government had to bear the loss. The farmer will charge the same price from the government as it was their decision and duty to distribute it at 1$ price. Shopkeeper will charge 1$ from the consumer as government has already fixed the maximum retail price as 1$.

Black market will definitely arise in the market. As the government is bearing the loss then someone must have taken the advantage, so the one who is getting advantage is farmer as he is selling ducks at 3$ and buying the same at 1$. So now the shopkeeper or consumers who will buy the ducks at 1$ will again sell it to government which will provide them 200% profit margin.