Market prices-III

Market prices3While the above analysis raises certain interesting issues, the manner in which the problem is handled leaves room for further reflection. In general, the extension of demand and supply curves, such as is done, to cover the black market area is not only logically untenable, it is also misleading in its implications. To an examination of this we shall now turn.

In the-first place, it is wrong to take the unobstructed black market demand curve to be just an extension of the original Z>-curve. It must be remembered that, according to hypothesis, the legal supply RT, is sold at the controlled price, OR, and is thus open to buyers within the range PV equally with the buyers belonging to the upper range. If, then, a part of the amount sold in the legal market is taken away by buyers lying in the range TV, the demand curve in the black market, in the absence of penalties, gets shifted above DP2. The stronger buyers within the range RT, with part of their demand unsatisfied, assert themselves in the black market and offer a price which is higher than is shown in the original demand curve. Neglecting obstacles to demand, therefore, the point T1 invariably lies vertically above the Z>-curve. So market prices is important.

As regards the black market supply curve, if risks attend black market selling, this curve should lie above the S-curve over its whole length, the distance between the two curves depending upon the marginal risk-cost associated with increasing sales in the black market. If the marginal risk-cost remains constant, the two curves will be parallel. If, on the other hand, as is more likely, the sellers are afraid that extension of sales in the black market will involve wider publicity and increasing risk of detection, the distance between the two curves will grow wider as they move to the right. In any case, the initial point on the black market supply curve will be vertically above T. Further, the amount sold in the legal market will depend not only upon average cost, as is assumed in the diagram, but also upon the degree of restriction that is placed upon black market selling. RT is certainly the maximum amount that can be sold at the controlled price, OR. Yet it may not be the actual amount released in the open market at that price, since the black markets would promise a higher return. To what extent output which could profitably be sold in the legal market would nevertheless disappear into the dark area will depend upon the rigour with which black market dealings are treated. So market prices is important.

Thirdly and this is by far the most important point about the whole matter the so-called black market is a bundle of isolated transactions which, strictly speaking, do not form a market at all. The illegal character of the transactions naturally precludes the possibility of that degree of intercommunication between buyers and sellers which makes for a perfect market with a uniform price. By its very nature, the black market, such as it is, is at best an imperfect institution in which individual buyers and sellers are, so to say, paired, and separate prices tend to evolve in respect of the same commodity the level in each case depending upon the relative strength of the parties. To talk of the black market price, determined at the point of intersection between the black market demand and supply curves, is thus illegitimate. Indeed the theory that is relevant here is rather that of imperfect market and discrimination, and the technique that is appropriate is that of marginal revenue and marginal cost.

The intersection between the black market demand and supply curves may point to a minimum price at which a parcel of product might be sold profitably, due account being taken of the risks of such sales; it does not indicate the average price at which the black market output is actually sold. Thus even if the black market supply curve cuts the black market demand curve at Px (as shown in the diagram), the amount bought and sold in the area will not be necessarily ONlt nor will the average price be necessarily P. Since some degree of discrimination will be possible, the average revenue curve will surely lie above 7″Z>6.  So market prices is important.

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