Question

The government decides that a specific scarce good should be provided for everyone who wants it...

The government decides that a specific scarce good should be provided for everyone who wants it at a price of zero and passes a law making it illegal to buy or sell the good. However, people can give the good away. This good is highly desirable for some of the population. What effect will this law have on the market? What would happen in this market if the law were removed?

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Answer #1

The new legislation is essentially a price ceiling. This price ceiling will have two effects. First, it will result in a shortage in the market since quantity demanded will now exceed quantity supplied. This supplied will be accompanied by a full economic price that is greater than the previous equilibrium price. The second effect will be emergence of a black market, whee the good will be traded illegally. Since there exist a positive cost associated with possibly being caught selling the good, the black market price will be higher than the previous equilibrium price.

If the law wee removed, the full equilibrium price would decrease and the equilibrium quantity would increase. Also the black market will disappear.

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