What primarily motivates producers and consumers to participate in black markets when price ceilings or price floors are imposed?

• A. The opportunity to buy or sell goods at prices above or below the legal limits
• B. The wish to increase government revenue
• C. The desire to avoid paying taxes on legal transactions
• D. The need to comply with government regulations

Answer: (A)

Verified step by step guidance

1. Understand the context: Price ceilings and price floors are government-imposed limits on how high or low prices can be set in a market. A price ceiling sets a maximum price, while a price floor sets a minimum price.
2. Recognize the effect of these controls: Price ceilings often lead to shortages because the legal price is set below the equilibrium price, causing demand to exceed supply. Price floors can lead to surpluses because the legal price is above equilibrium, causing supply to exceed demand.
3. Identify the motivation for black market participation: When legal prices are restricted, some producers and consumers seek to transact at prices outside these limits to better meet their preferences or maximize profits.
4. Analyze the options: The opportunity to buy or sell goods at prices above or below the legal limits directly relates to the incentive created by price controls, as black markets allow transactions at these non-regulated prices.
5. Conclude that the primary motivation is economic gain from circumventing price restrictions, rather than government revenue, tax avoidance, or regulatory compliance.