Question

Explain how the government’s setting a price floor in a market can create an imbalance between supply and demand. Provide an example and illustrate your answer with a graph. d)

Define the term “black market” and explain how a price ceiling can help create a black market. Provide an example and outline the welfare effects of a back market.

Answer 1

Black market transactions avoid the price set by government and mostly involve illegal activities. A price ceiling can help create a black market as intermediate or Producers Sometimes, start selling their goods for illegal activities as price higher than the ceiled one.

For example, instead of selling the assigned good to unfortunates as prescribed on the ceiled price, they sell it at higher costs to other people.

There is no such welfare affect of black market.