In a number of cases, the government, proceeding from certain political, economic, or social interests, establishes restrictions on the market to exert a stimulating or restraining effect on it. However, the government’s actions disrupt the mechanism of market forces, and as a result, such situations may arise in which the market would not remain balanced.
For example, the imposition of a price ceiling is a popular measure of government regulation in certain markets. Usually, these are the markets of essential goods such as medicines or basic food like bread and meat. With a price ceiling, the state does not allow the manufacturer to exceed a given price level. The main intention of this regulation is that so even the poorest segments of the population can purchase these goods. However, the other side of it is the emergence of a deficit, where not everyone will be able to purchase the product due to the limited amounts of it. Therefore, such actions are usually complemented by additional governmental supplies of deficit goods, which compensate for the shortage arising in the market.
Usually, a market deficiency is accompanied by two effects. On the one hand, the deficit creates a certain social pressure on both the state and manufacturers, demanding it necessary to use non-market methods of distributing the scarce product. For example, the state can distribute the deficient goods by the consumer coupons, which will lead to constant queues of people who want to buy them at a low price. On the other hand, there will be buyers who could pay more than the official or market price and who will not want to stand in line. These buyers will form a “black market” – an unofficial market for selling any quantity of regulated goods at the demand price.
- P – price
- Pmax – maximum price
- Q – quantity
- D – demand
- S – supply
- Qs – quantity of supply
- Qd – quantity of demand