When a price ceiling below equilibrium is enforced, which phenomenon is likely to emerge?

When a price ceiling below equilibrium is enforced, which phenomenon is likely to emerge?

• A. Rapid increase in production
• B. Stable market with no changes
• C. A black market or illegal trading
• D. Decrease in demand to zero

Answer: (C)

When a price ceiling set below the market-clearing price is imposed, it is binding, creating a shortage because the quantity demanded exceeds the quantity supplied at that price. Producers may not find it profitable to supply more at the lower price, while buyers want to purchase more, so the market cannot clear. To cope with the shortage and to profit from the illegal profit margin, a black market or illegal trading tends to emerge where the good is bought and sold above the ceiling price. This reflects incentives to bypass the legal limit. The other options don’t fit: production doesn’t rapidly rise under a price constraint, the market doesn’t stay perfectly stable with no changes, and demand doesn’t simply fall to zero—the shortage is the more natural outcome.

When a price ceiling set below the market-clearing price is imposed, it is binding, creating a shortage because the quantity demanded exceeds the quantity supplied at that price. Producers may not find it profitable to supply more at the lower price, while buyers want to purchase more, so the market cannot clear. To cope with the shortage and to profit from the illegal profit margin, a black market or illegal trading tends to emerge where the good is bought and sold above the ceiling price. This reflects incentives to bypass the legal limit. The other options don’t fit: production doesn’t rapidly rise under a price constraint, the market doesn’t stay perfectly stable with no changes, and demand doesn’t simply fall to zero—the shortage is the more natural outcome.