As illustrated here, a binding price ceiling causes a short-run shortage, which then worsens into a long-run shortage. what, in this particular scenario, happens to the black-market price between the short run and the long run?

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As illustrated here, a binding price ceiling causes a short-run shortage, which then worsens into a long-run shortage. what, in this particular scenario, happens to the black-market price between the short run and the long run?

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Liu · Answer 1

Price ceiling is a price regulatory system put in place by the government to check how high the price of a product can be. It is binding when it is set below the equilibrium price consequently leading to shortage of goods, but non binding if set above the equilibrium price since the price can still fall back to the equilibrium.

When shortage arises as a result of price ceiling being set below the equilibrium price, black market is formed to resolved the shortage with price set by supply and demand. Goods will be illegally sold at prices above the price ceiling.

The effect on black market in the short run will not be severe as the as demand and supply are still at the inelastic stage, but becomes severe in the long run due to elastics demand and supply.