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The Effects of a Black Market Using Supply and Demand

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The Effects of a Black Market Using Supply and Demand
The Effects of a Black Market Using Supply and Demand

Black Market Supply and Demand Illustration - 2

Now when a government makes a product illegal, such as marijuana we tend to see two things happen:
  • A sharp drop in supply, as the penalties for selling the good causepeople to shift into other industries

  • A drop in demand, as a prohibition of posessing the good deters some people from wanting to buy it
Typically the supply side effects dominate the demand side ones when the government creates a black market. When this happens, we have the situation as shown in the picture, where the supply drops (shifts to the left) a fair deal, and the demand drops (shifts to the left) slightly. This is shown with the new dark blue demand curve and the new dark red supply curve.

The shift in supply and demand causes the quantity consumed of the black market good to decrease, while the price rises. If the demand side effects dominate, we will still see a drop in quantity consumed, but we will also see a corresponding drop in price. This does not typically happen in a black market - we normally see a rise in price.

The amount of the price change and the change in quantity consumed will depend on the magnitude of the shifts of the curve, as well as the price elasticity of demand and the price elasticity of supply.

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