Question

During WWII, Prime Minister Mackenzie King enacted price controls across Canada, which put price ceilings on rents, coals, sugar, timber, steel, milk, and other goods. This resulted in shortages across the country. Some Canadians resorted to the black market in order to get much-needed supplies. Using a supply and demand diagram, clearly explain how the black market solved the problem of shortages for consumers who decided to use it.

Answer 1

Figure-1 in the document attached below illustrates the shortage in the hypothetical market and the creation of the black market consequently. The y and the x-axes in figure-1 represent the price and quantity of the good or P and Q respectively. The D and S curves denote the demand and supply curve of the good and P* and Q* represent the equilibrium price and quantity of the good corresponding to the intersection between the D and S curves. The Pc denotes the price ceiling enforced by the government in the market which is below the equilibrium price of the concerned good or P*. Note in the figure that at Pc, the quantity demanded of the good is labeled as Q(D) corresponding to the D curve, and the quantity supplied of the good at Pc is denoted as Q(S) corresponding to the S curve. The shortage in the market at Pc or price ceiling is indicated or expressed as the difference between Q(D) and Q(S). As a result, some consumers in the market are not able to buy the concerned good or product due to insufficient availability or shortage in the market due to the imposition of price ceiling and it is officially illegal to sell the good higher than the stipulated price ceiling. Therefore, these consumers can purchase the good in the black market and the maximum price that can be charged to sell the good or product has been labeled as P(B) in the figure which is the willingness to pay by the consumers to buy or purchase Q(S) amount or quantity of the good. Hence, those consumers who are not able to buy the good in the regular market due to insufficient availability or the shortage can purchase the same in the black market.