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

Refer below graph.

Price ceiling is set at C. This is below the market driven equilibrium price. If the ceiling is set up above equilibrium point, there could not be a shortage.

At the ceiling price there is a shortage of Q2 - Q1 due to mismatch between quantity supplied and quantity demanded.

Q2 could be supplied only at prices higher than the equilibrium price where there is no matching demand.

Therefore the black market premium is (PE-C) and the shortge fulfilled by black market is QE - Q1.

(Note: the functioning of black market differs for different commodities like perishables or durables, time frame etc.)