Question

Why does a price ceiling create a black market? Why does a price floor create a grey

market?

Answer 1

Answer.) A price ceiling occurs when the price is artificially held below the equilibrium price and is not allowed to rise. There are many examples of price ceilings. Most price ceilings involve the government in some way. For example, in many cities, there are rent controls. This means that the maximum rent that can be charged is set by a governmental agency. This rent is usually allowed to rise a certain percent each year to keep up with inflation. However, the rent is below the equilibrium rent. Since prices are arbitrarily low, Price ceilings provide a gain for buyers and a loss for sellers. Sellers would like to avoid the loss if they can. One way to do so is called a black market. In this case, the sellers illegally raise the price and hope to get away with it. So, for example, tickets to popular events are sold by scalpers at high prices.While there are many other examples. A price floor exists when the price is artificially held above the equilibrium price and is not allowed to fall. There are many examples of price floors. In some cases, private businesses maintain the price floor while, in other cases, it is the government that maintains the price floor. Black markets are not smart; it is just too easy to be caught. It is also not smart because of the existence of gray markets. A gray market is a way of getting around the price ceiling without actually doing anything illegal. There are two forms of gray market. One form of gray market involves charging for goods or services that were formerly provided free. If the rent cannot be raised on the apartment, there is nothing preventing the landlord from charging for the parking space, charging for use of the elevator, charging for gardening and cleaning services, forcing the tenants to pay for electricity and water, and so forth.  The second form of gray market is to provide less service for the same price. The apartment owner would not repair, clean, paint, nor otherwise maintain the apartment building.