Question

Situation 4-1

During the winter of 1973-74, a general system of wage and price controls (including a price ceiling on gasoline) was in force in the United States. At the beginning of 1974, some oil-producing countries imposed an oil embargo (a legal prohibition on commerce) on the West. In the spring of 1974, price controls were abolished.

Refer to Situation 4-1. Because price controls were in effect at the time the embargo occurred, an economist would have most likely predicted that

a)the number of dollars one would need to pay at the pump (legally) for a full tank of gasoline would increase sharply.

b)the number of dollars one would need to pay at the pump (legally) for a full tank of gasoline would decline sharply.

c)long waiting lines and black markets would appear.

d)a surplus of gasoline would result.

Answer 1

In such a situation , an economist would have most likely predicted that:

option c.) long waiting lines and black markets would appear. This would happen because of the reason that, price control would lead to black marketing which is, transactions that usually occur “under the table” to let participants avoid government price controls or taxes. Further there will be long ques outside the pump to get gasoline as limited stock since the oil producing countries imposed an oil embargo. The others would not follow as because the first option price cannot increase sharply as there was price ceiling,in the second option price cannot reduce sharply as it is not economically possible for scarce products and the fourth option a surplus of gasoline cannot result since it is a limited quantity product because of oil embargo now and more and more people would like to purchase it.

Thus it would only result in long lines and black marketing.