The risk of price escalation in a market subject to price controls can be addressed by which of the following?

• A. Reducing the supply of the good through government intervention
• B. Implementing effective enforcement against black market activities
• C. Raising the price ceiling above the equilibrium price
• D. Allowing unrestricted entry of sellers into the market

Answer: (B)

Verified step by step guidance

1. Understand the concept of price controls: Price controls are government-imposed limits on the prices that can be charged for goods or services, often set below the market equilibrium price to make goods affordable.
2. Recognize the problem of price escalation under price controls: When a price ceiling is set below equilibrium, shortages occur, leading to potential black market activities where goods are sold at higher prices unofficially.
3. Analyze the options given: Reducing supply through government intervention would worsen shortages, raising the price ceiling above equilibrium removes the price control, and allowing unrestricted entry might increase supply but does not directly address black markets.
4. Identify that effective enforcement against black market activities helps prevent illegal resale at higher prices, thus addressing the risk of price escalation caused by shortages under price controls.
5. Conclude that among the options, implementing effective enforcement against black market activities is the correct approach to mitigate price escalation risks in a controlled price environment.