ECONOMIC WEEKLY
J a n u a r y 26, 1950
The Theory Of Black Market Prices
A. K. Das Gupta
T
HE E S S E N T I A L function of
the price mechanism is the
smooth clearance of the available
supply i n a m a r k e t . A n economic
good is a good whose supply is
scarce in r e l a t i o n to demand,—
Scarcity' i m p l y i n g s i m p l y that
the entire w a n t of the society is
not satisfied by the available supp l y . In v i e w of the scarcity of
supply, buyers press against one
another, and those
who f a i l to
offer the r u l i n g price in the market go unsatisfied.
Price thus
measures the strength of e x c l u d e d
demand,—being d e t e r m i n e d by
the degree of scarcity of supply
r e l a t i v e l y to the m a r k e t demand.
In a free price system, excess dem a n d or excess supply are r u l e d
out.
Excess demand is a signal
for a p r i c e rise, and excess supply
is a signal for a price f a l l . C o m petition among buyers and sellers
brings it about that a p r i c e is settled in the m a r k e t at w h i c h dem a n d is equated to the supply.
The available supply is taken off
the m a r k e t by those buyers w h o
are r e l a t i v e l y stronger and are
prepared to offer the r u l i n g price;
those w h o cannot afford to pay
the r u l i n g price go unsatisfied.
The strength of the buyers as expressed
in the m a r k e t depends
not m e r e l y upon the degree of
willingness to have a good, b u t
also upon the capacity to pay for
it.
T h e price at w h i c h demand is
equated to the supply is called by
economists the n o r m a l price. I n
a free m a r k e t , demand a n d supply
forces can be relied on to secure
the establishment
of a n o r m a l
price and to ensure the smooth
disposal of a c o m m o d i t y . Each
has the r i g h t to b i d his o w n price
for the c o m m o d i t y that he wants,
and if the p r i c e offered satisfies
the seller, the deal is finished w i t h out m o r e ado. On the other hand,
however intense the need that he
may feel for a c o m m o d i t y , it remains unsatisfied unless it is backed by t h e p o w e r -to pay a p r i c e
w h i c h w i l l satisfy the seller. T h e
free price system is thus a d e l i cate mechanism
t h r o u g h which
are avoided a l l k i n d s of manoeuvrings that w o u l d otherwise appear
in society as a r e s u l t of the pressure of demand u p o n scarce
supply.
certain circumstances lead to a
m a r e desirable d i s t r i b u t i o n of the
available supply.
T h e r e is, however, one aspect of
the m a t t e r w h i c h must not be lost
sight of. T h e l i m i t a t i o n of the
free p r i c e system that we have
Y e t there is j u s t one l i m i t a t i o n mentioned-arises out of large i n of the free price system, however equalities of income.
It is besatisfactory it m i g h t be in respect cause of this i n e q u a l i t y that the
of the smooth d e l i v e r y of goods. n o r m a l price fails to satisfy the
T h e system caters to t h e wants of general need of the society to the
stronger members of the society extent deemed desirable. N o w , if
at the expense of its w e a k e r m e m - this p r o b l e m of i n e q u a l i t y can be
bers. A n d since this s t r e n g t h ex- tackled d i r e c t l y ,
t h r o u g h taxes
presses itself, p a r t l y at any rate, and subsidies, or t h r o u g h other
in terms of the capacity to pay, measures of general income conthe d i s t r i b u t i o n of a good, as it t r o l , the case for price control
takes place t h r o u g h the m a r k e t surely disappears. If the income
mechanism,
t u r n s out to be in r a t i o between different groups in
accordance w i t h the r e l a t i v e the society is b r o u g h t d o w n to
'income' of the citizens r a t h e r t h a n the l e v e l that is considered desiri n accordance w i t h t h e i r r e l a t i v e able, the free price system surely
needs. A n d in a society w h i c h is comes i n t o its o w n . In p r i n c i p l e ,
characterised b y large i n e q u a l i - indeed, this is a surer w a y of
ties of income, this l i m i t a t i o n achieving the objective that we
proves a serious l i m i t a t i o n .
have in v i e w . Whereas an overa l l income c o n t r o l relieves the
This is the sanction for price State of the necessity of l o o k i n g
c o n t r o l . If the n o r m a l price is into i n d i v i d u a l markets, the p r i n f o u n d too h i g h
for the poorer ciple of price c o n t r o l , since it resection o f the c o m m u n i t y a n d i f lates to i n d i v i d u a l markets, reit is felt that they should also be quires a w i d e r and a more exallowed to have a share of the tended supervision, its n a t u r e deavailable supply of a c o m m o d i t y , p e n d i n g upon the character of the
the State comes f o r w a r d and fixes m a r k e t and the n u m b e r of coma legal m a x i m u m for the m a r k e t modities to be controlled.
price. A price b e l o w ' n o r m a l ' is
fixed and sellers are coerced into
W h a t happens if the price of a
accepting w h a t is deemed to be c o m m o d i t y is fixed by the State at
the m a x i m u m allowable, consist- a l e v e l b e l o w w h a t it w o u l d be
e n t l y w i t h the d e m a n d coming under t h e free play of t h e forces
f r o m the r e l a t i v e l y poor.* A price of d e m a n d and supply? A state of
fixed below n o r m a l does b r i n g the 'excess demand' is created; sellers
c o n t r o l l e d good w i t h i n the reach offer to sell a q u a n t i t y w h i c h
of the h i t h e r t o unsatisfied buyers, falls short of that w h i c h the b u y a l t h o u g h in d o i n g so, it deprives ers are w i l l i n g to b u y at the given
the stronger buyers
of a share price. The m a r k e t thus expet h a t w o u l d , in t h e absence of riences 'shortage' w h i c h is to be
c o n t r o l , belong t o t h e m . I f the distinguished f r o m 'scarcity' prosc o n t r o l is j u d i c i o u s l y a n d effec- per. For, whereas 'scarcity' det i v e l y administered, i t m a y under notes m e r e l y t h a t some demand is
excluded because the buyers can* The opposite case,—that of not afford to p a y the r u l i n g price,
fixing a m i n i m u m price,—is not 'shortage' indicates that even
relevant to o u r present p r o b l e m those b u y e r s w h o are willing to
pay a p r i c e acceptable to the
a n d is therefore r u l e d out.
97
ECONOMIC W E E K L Y
January 26, 1950
The Theory Of Black Market Prices
A. K. Das Gupta
'HE ESSENTIAL f u n c t i o n of
the price mechanism is the
smooth clearance of the available
supply i n a m a r k e t . A n economic
good is a good whose supply is
scarce in r e l a t i o n to demand,—
'scarcity' i m p l y i n g s i m p l y t h a t
t h e entire w a n t of the society is
n o t satisfied by the available supp l y . In v i e w of the scarcity of
supply, buyers press against one
another, and those w h o f a i l to
offer the r u l i n g price in the mark e t go unsatisfied.
P r i c e thus
measures the strength of excluded
demand, - b e i n g d e t e r m i n e d b y
the degree of scarcity of supply
r e l a t i v e l y to the m a r k e t demand.
In a free price system, excess dem a n d or excess supply are r u l e d
out.
Excess demand is a signal
for a price rise, and excess supply
is a signal for a p r i c e f a l l . C o m p e t i t i o n among buyers and sellers
brings it about that a price is sett l e d in the m a r k e t at w h i c h dem a n d is equated to the supply.
T h e available supply is t a k e n off
the m a r k e t by those b u y e r s w h o
are relatively stronger
and are
prepared to offer the r u l i n g price;
those who cannot afford to p a y
the r u l i n g price go unsatisfied.
T h e strength of the b u y e r s as expressed
in the m a r k e t depends
n o t m e r e l y upon the degree of
willingness to have a good, b u t
also upon the capacity to pay for
it
T
T h e price at w h i c h demand is
equated to the supply is called by
economists the n o r m a l price. I n
a free m a r k e t , demand and s u p p l y
forces can be relied on to secure
the establishment
of a n o r m a l
p r i c e and to ensure the smooth
disposal of a c o m m o d i t y . Each
has the r i g h t to b i d his o w n p r i c e
for the c o m m o d i t y that he wants,
and if the p r i c e offered satisfies
the seller, the deal is finished w i t h o u t more ado. On the other hand,
h o w e v e r intense the need that he
m a y feel for a c o m m o d i t y , It r e mains unsatisfied unless it is backed by the p o w e r -to p a y a p r i c e
w h i c h w i l l satisfy the seller, T h e
free price system is thus a d e l i cate mechanism
through which
are avoided a l l k i n d s of m a n o e u v r ings that w o u l d o t h e r w i s e appear
in society as a r e s u l t of the pressure of d e m a n d upon scarce
supply.
Y e t there is j u s t one l i m i t a t i o n
of the free price system, h o w e v e r
satisfactory i t m i g h t b e i n respect
of the smooth d e l i v e r y of goods.
T h e system caters to the wants of
stronger members of the society
at the expense of its w e a k e r m e m bers. A n d since this s t r e n g t h expresses itself, p a r t l y at any rate,
in terms of the capacity to pay,
the d i s t r i b u t i o n of a good, as it
takes place t h r o u g h the m a r k e t
mechanism,
t u r n s o u t to be in
accordance
w i t h the relative
'income' of the citizens r a t h e r t h a n
i n accordance w i t h t h e i r r e l a t i v e
needs. A n d in a society w h i c h is
characterised b y large i n e q u a l i ties of income, t h i s l i m i t a t i o n
proves a serious l i m i t a t i o n .
T h i s is the sanction for price
c o n t r o l . I f the n o r m a l price i s
f o u n d too h i g h
for the poorer
section of the c o m m u n i t y and if
it is felt that they should also be
allowed to have a share of the
available s u p p l y of a c o m m o d i t y ,
the State comes f o r w a r d and fixes
a legal m a x i m u m for the m a r k e t
price. A price b e l o w ' n o r m a l ' is
fixed and sellers are coerced i n t o
accepting w h a t is deemed to be
the m a x i m u m a l l o w a b l e , consistently w i t h the d e m a n d c o m i n g
f r o m the r e l a t i v e l y poor.* A p r i c e
f i x e d below n o r m a l does b r i n g the
controlled good w i t h i n the reach
of the h i t h e r t o unsatisfied buyers,
a l t h o u g h in d o i n g so, it deprives
the stronger buyers
of a share
t h a t w o u l d , in the absence of
c o n t r o l , belong t o t h e m . I f the
c o n t r o l is j u d i c i o u s l y and effect i v e l y administered, i t m a y under
* T h e opposite case,—that of
fixing a m i n i m u m price,—is n o t
relevant t o o u r present p r o b l e m
and is therefore r u l e d out.
97
certain circumstances lead to a
m o r e desirable d i s t r i b u t i o n of the
available supply.
There is, however, one aspect of
the m a t t e r w h i c h must not be lost
sight of. T h e l i m i t a t i o n of the
free price system t h a t we have
mentioned-arises out of large i n equalities of income.
It is because of this i n e q u a l i t y t h a t the
n o r m a l price fails to satisfy the
general need of the society to the
extent deemed desirable. N o w , if
this p r o b l e m of i n e q u a l i t y can be
tackled d i r e c t l y ,
t h r o u g h taxes
and subsidies, or t h r o u g h other
measures of general income cont r o l , the case for price control
surely disappears. If the income
ratio between different groups in
the society is b r o u g h t d o w n to
the l e v e l t h a t is considered desirable, the free price system surely
comes i n t o its o w n . In p r i n c i p l e ,
indeed, this is a surer w a y of
achieving the objective that we
have i n v i e w . Whereas a n overa l l income c o n t r o l relieves the
State of the necessity of l o o k i n g
into i n d i v i d u a l markets, the p r i n ciple of price c o n t r o l , since it relates to i n d i v i d u a l markets, requires a w i d e r and a more extended supervision, its n a t u r e dep e n d i n g u p o n the character of the
m a r k e t and the n u m b e r of commodities to be controlled.
W h a t happens if the price of a
c o m m o d i t y is fixed by the State at
a level b e l o w w h a t it w o u l d be
under the free play of t h e forces
of demand a n d supply? A state of
'excess demand' is created; sellers
offer to sell a q u a n t i t y w h i c h
falls short o f that w h i c h t h e l a y ers are w i l l i n g to b u y at the given
price. T h e m a r k e t thus experiences 'shortage' w h i c h is to be
distinguished f r o m 'scarcity' prosper. For, whereas 'scarcity' denotes m e r e l y t h a t some demand is
e x c l u d e d because the buyers cann o t afford t o p a y t h e r u l i n g price,
'shortage'
indicates that even
those b u y e r s w h o are w i l t i n g to
pay a p r i c e acceptable to t h e
J a n u a r y 26, 1950
ECONOMIC WEEKLY
sellers m a y have to go unsatisfied. Scarcity is u b i q u i t o u s in t h e
exchange economy; the fact that
a p r i c e is to be p a i d at a l l is an
i n d i c a t i o n t h a t scarcity exists.
Shortage, on the other h a n d , is the
outcome of an a r t i f i c i a l c o n t r o l
w h i c h puts a b r a k e on supply b u t
at the same t i m e releases a dem a n d w h i c h otherwise w o u l d rem a i n subdued.
H o w is this short supply dist r i b u t e d among the i n t e n d i n g
b u y e r s ? Does it go to those w h o
come first, or to those w h o are
physically stronger and can p u s h
others out of the m a r k e t ? O b v i ously any such processes w o u l d
frustrate the object of p r i c e cont r o l T h e technique o f r a t i o n i n g
is t h u s the essential c o r o l l a r y of
a system of p r i c e c o n t r o l . T h e
c o n t r o l l i n g a u t h o r i t y undertakes
to arrange a d i s t r i b u t i o n of w h a t ever supply is available at the
legal price among the i n t e n d i n g
buyers according to t h e i r r e l a t i v e
needs. T h i s o b v i o u s l y means
that, a l t h o u g h people 'at the bott o m of the scale' get a part of t h e i r
demand satisfied, those
at the
upper end of the scale are asked
to accept a r a t i o n smaller t h a n
w h a t , w i t h t h e i r stronger p u r chasing power, t h e y c o u l d secure
in a free m a r k e t by b i d d i n g up
prices. H e r e , therefore, are b u y ers eager to pay h i g h e r prices for
an e x t r a supply a n d sellers
e q u a l l y eager to s w i t c h on to the
stronger m a r k e t if o n l y such a
m a r k e t can be created. T h u s the
emergence of the so-called 'black
m a r k e t ' is the inevitable consequence of p r i c e c o n t r o l a n d
r a t i o n i n g . Because there are b u y ers p r e p a r e d to b u y at h i g h e r
prices m o r e t h a n t h e i r r a t i o n
coupons a l l o w , a n d because there
are sellers to w h o m the commerc i a l code r a t h e r t h a n t h e l a w o f
the l a n d is supreme, a n d w h o are
therefore anxious to sell t h e i r
good to the highest bidder, an
area tends i n e v i t a b l y to develop
over w h i c h transactions take
place at prices h i g h e r t h a n t h e
legal m a x i m u m , — i t s extent dep e n d i n g u p o n t h e degree of supervision
exercised
by the state
t o w a r d s the enforcement of l a w .
H o w are b l a c k m a r k e t prices
determined" Do they tend to be
lower than the n o r m a l price as it
w o u l d b e i n a free m a r k e t ? W h a t
tends to be the o u t p u t of a commodity that finds its way into black
markets? Does i t exceed, o r f a l l
short o f the n o r m a l o u t p u t ? T h i s
is a n e w field of e n q u i r y w h i c h
has opened u p i n t h e w a k e o f w a r
a n d post-war p r i c e controls and
r a t i o n i n g . F o r , since these controls have been i n t r o d u c e d , black
m a r k e t s have been a c o m m o n
phenomenon almost e v e r y w h e r e .
n o t h a v e access, K e n n e t h E.
Boulding's
Economic
Analysis
contains an ingenious t h e o r y of
black m a r k e t prices, a l t h o u g h
even here, as t h e present paper
p u r p o r t s to show, t h e m a t t e r has
been presented in too simpliste a
fashion and the essential character
of the phenomenon has been lost
sight of.
N o t enough has y e t been done,
i t appears, b y o u r economists t o
analyse the affairs of the b l a c k
m a r k e t s . We have h a d a l o t of
discussion concerning the d i f f i c u l ties a r i s i n g f r o m the heterogeneity o f products w i t h i n the
same i n d u s t r y , differences i n the
costs of different firms, vagueness of the needs of consumers,
etc. We have also been t o l d about
the possible f a i l u r e of p r i c e cont r o l measures i n v i e w o f the i l l e g a l
transactions t h a t 'shortages' w o u l d
inevitably call forth.
But
the
a c t u a l operations of the black
markets, inspite o f t h e i r w i d e p r e valence, have been left p r a c t i c a l l y
alone. B u t n o t e n t i r e l y . A p a r t
f r o m a few J o u r n a l articles to
w h i c h the present w r i t e r c o u l d
D a n d S represent the n o r m a l
demand and supply curves as t h e y
w o u l d be in the absence of cont r o l . PN w o u l d then be t h e n o r m a l price, and ON t h e a m o u n t
b o u g h t and sold. I f , n o w , OR is
fixed by the State to be the m a x i m u m price a t w h i c h b u y i n g a n d
selling are legally a l l o w e d , the
q u a n t i t y supplied comes d o w n t o
RT a n d the q u a n t i t y demanded
goes up to R V . To relieve the
congestion of demand, the c o m m o d i t y is rationed. B u t since t h e
available supply in t h e legal mar-r
ket is o n l y RT, m a n y w i l l i n g
buyers go unsatisfied, a n d an
illegal m a r k e t develops. W h a t
are the demand a n d supply conditions i n this i l l e g a l m a r k e t ?
Here is Boulding's o w n story:
The following diagram is the
basis of B o u l d i n g ' s analysis. 1
ECONOMIC W E E K L Y
J a n u a r y 26, 1950
" W e can postulate a 'black m a r k e t
supply curve', TSB l y i n g to the
left of the normal supply curve
TS. As operations in the b l a c k
m a r k e t i n v o l v e a certain r i s k
above w h a t w o u l d be necessary
in a free m a r k e t , suppliers are
n o t t o b e found w i l l i n g t o s u p p l y
as m u c h at each price in the b l a c k
m a r k e t as w o u l d be done in t h e
f r e e m a r k e t ; i n other words, because of the h i g h e r costs it n o w
takes a higher price to call f o r t h
any given quantity than it d i d
before. T h e h i g h e r t h e costs of
black
market
operation,
the
steeper w i l l TSB rise. We can
s i m i l a r l y postulate a b l a c k m a r k e t
d e m a n d curve, T ' D b . E v e n at t h e
legal m a x i m u m price (OR) we
m a y suppose t h a t not a l l p o t e n t i a l
b u y e r s are w i l l i n g t o b u y i n t h e
b l a c k m a r k e t , so that the q u a n t i t y demanded i n the black m a r k e t at t h e price OR is n o t the t o t a l
unsatisfied demand q u a n t i t y , T V .
b u t a smaller q u a n t i t y TDb . . . .
T h e n the black m a r k e t price is
P 1 ,N 1 and the q u a n t i t y bought a n d
sold in the black m a r k e t is TK,
RK b e i n g the t o t a l q u a n t i t y in the
legal and the b l a c k m a r k e t c o m b i n e d , and RT the q u a n t i t y in t h e
legal m a r k e t . "
It is further
a r g u e d that in case "there are no
penalties of any k i n d , legal or
m o r a l , attached to purchases in
t h e b l a c k m a r k e t , the black m a r k e t demand c u r v e w i l l b e the
same as the n o r m a l d e m a n d
c u r v e , DP2, so that, w i t h T S B
as the black m a r k e t supply c u r v e ,
t h e b l a c k m a r k e t price w i l l b e a s
h i g h as P 2 N 2 . On the other h a n d ,
if suppliers are unmolested a n d
penalties are placed o n l y on
b l a c k m a r k e t buyers, t h e b l a c k
m a r k e t price w i l l be as l o w as
t h e r e s u l t i n g average price is less
t h a n that w h i c h w o u l d have
obtained in a perfectly free m a r ket." A n d t h i r d l y , the m o r e
r i g o r o u s are the measures t a k e n
against the b l a c k m a r k e t b u y e r s
t h e l o w e r is the b l a c k m a r k e t
p r i c e , and t h e larger t h e penalties
placed on sellers, the higher is the
b l a c k m a r k e t price,—the inference
f r o m this being that "other things
b e i n g equal, i t w o u l d b e better t o
penalize the b u y e r s rather t h a n
the sellers i n t h e b l a c k m a r k e t ,
t h e housewife rather t h a n the
grocer.''
W h i l e the above analysis raises
c e r t a i n interesting issues, the
manner in w h i c h the problem is
h a n d l e d leaves r o o m for f u r t h e r
reflection. I n general, the extension of demand and supply curves,
such as is done, to cover the black
m a r k e t area is not o n l y l o g i c a l l y
untenable b u t is also misleading
i n its implications. T o a n e x a m i n a t i o n o f this w e shall n o w t u r n .
I n the f i r s t place, i t i s w r o n g t o
take the unobstructed black m a r k e t demand c u r v e to be j u s t an
extension of the o r i g i n a l D—
curve. I t m u s t b e r e m e m b e r e d
that, according to hypothesis, the
legal supply, RT, is sold at the
c o n t r o l l e d price, OR, and is thus
open to buyers w i t h i n the range
PV equally w i t h t h e b u y e r s bel o n g i n g to the upper range. I f ,
then, a p a r t of the a m o u n t sold in
the legal m a r k e t is t a k e n a w a y by
buyers l y i n g b e l o w the range RT,
the demand c u r v e in the b l a c k
m a r k e t , in t h e absence of penalties, gets shifted above DP2. T h e
stronger b u y e r s w i t h i n the range
RT, w i t h p a r t o f t h e i r demand u n satisfied, assert themselves in t h e
black m a r k e t and offer a p r i c e
B o u l d i n g derives the f o l l o w i n g w h i c h i s higher t h a n i s shown i n
conclusions f r o m his analysis of the o r i g i n a l demand curve. N e g lecting obstacles to demand, therethe black market:
fore, the p o i n t T 1 i n v a r i a b l y lies
F i r s t , the b l a c k m a r k e t p r i c e v e r t i c a l l y above the D — c u r v e .
m a y be less t h a n the n o r m a l p r i c e
A s regards the black m a r k e t
as it w o u l d be in a free m a r k e t ;
P 1 N 1 , as the d i a g r a m shows, is s u p p l y curve, i f r i s k s attend b l a c k
less t h a n P N . Secondly, the aver- m a r k e t selling, this c u r v e s h o u l d
age p r i c e i n t h e legal and the lie above the S—curve over i t s
b l a c k m a r k e t together is l i k e l y to w h o l e length, the distance betbe less t h a n t h e n o r m a l price, so ween the t w o curves d e p e n d i n g
t h a t "even if a b l a c k m a r k e t deve- u p o n the m a r g i n a l risk-cost assolops as a result of p r i c e c o n t r o l ciated w i t h increasing sales i n t h e
99
b l a c k m a r k e t . I f the m a r g i n a l
risk-cost remains constant; the 1
t w o curves w i l l b e parallel. If, o n
the other hand, as is more l i k e l y ,
t h e sellers are afraid that extension of sales in the black m a r k e t
w i l l involve w i d e r p u b i c i t y and
increasing r i s k of detection, the
distance between the t w o curves
w i l l g r o w w i d e r as they move to
t h e r i g h t . I n any case, the i n i t i a l
p o i n t on the black m a r k e t s u p p l y
c u r v e w i l l b e v e r t i c a l l y above T .
F u r t h e r , the amount sold i n the
legal m a r k e t w i l l depend not o n l y
u p o n average cost, as is assumed
in the diagram, b u t also u p o n the
degree of r e s t r i c t i o n that is placed
u p o n black m a r k e t selling. RT is
c e r t a i n l y the m a x i m u m a m o u n t
t h a t can be sold at the c o n t r o l l e d
p r i c e , O R . Y e t it may not be t h e
actual amount released i n t h e
open m a r k e t at that price, since
the black m a r k e t s w o u l d p r o m i s e
a higher r e t u r n . To w h a t extent
o u t p u t w h i c h c o u l d profitably b e
sold in the legal m a r k e t w o u l d
nevertheless disappear i n t o
the
d a r k area w i l l depend u p o n t h e
r i g o u r w i t h w h i c h black m a r k e t
dealings are treated,
T h i r d l y , — a n d this is by far the
most i m p o r t a n t p o i n t about t h e
whole
matter,—the
so-called
b l a c k m a r k e t is a bundle of isolated transactions w h i c h , s t r i c t l y
speaking, do not f o r m a m a r k e t
at a l l . T h e illegal character of the
transactions n a t u r a l l y precludes
t h e possibility of that degree of
inter-communication
between
buyers and sellers w h i c h makes
for a perfect m a r k e t w i t h a u n i f o r m price. B y its v e r y n a t u r e ,
the black market, such as it is, is
at best an imperfect i n s t i t u t i o n in
w h i c h i n d i v i d u a l buyers and
sellers are, so to say, p a i r e d , a n d
separate prices t e n d to evolve in
respect of the same c o m m o d i t y ,
—the l e v e l in each case depending
u p o n the r e l a t i v e strength of -the
parties. T o t a l k o f the black mark e t price, d e t e r m i n e d at the point
o f intersection between t h e b l a c k
m a r k e t demand
and supply
curves, is thus illegitimate. Indeed
t h e t h e o r y t h a t is relevant here is
r a t h e r t h a t o f imperfect m a r k e t
a n d d i s c r i m i n a t i o n , and the techn i q u e t h a t is appropriate is that
of m a r g i n a l revenue and m a r g i n a l
ECONOMIC W E E K L Y
cost, T h e intersection between
' t h e b l a c k m a r k e t demand a n d
s u p p l y curves m a y point to a
m i n i m u m price at w h i c h a p a r c e l
of p r o d u c t might be sold p r o f i t a b l y , due account b e i n g taken of
the risks of such sales; it does n o t
indicate the average p r i c e at
w h i c h the black market output
is actually sold. T h u s even if
t h e black m a r k e t supply c u r v e
cuts the black m a r k e t demand
c u r v e at P 1 (as shown in the diag r a m ) , the a m o u n t bought a n d
sold i n the area w i l l not be necessarily ON1 nor w i l l the average
p r i c e be necessarily P 1 N 1 . Since
some degree of d i s c r i m i n a t i o n w i l l
be possible, the average revenue
c u r v e w i l l surely l i e above T'Db.
W h a t does a l l this lead to? H o w
are o u r generalisations concerning
b l a c k m a r k e t s affected by these
considerations?
In the first place, since the black
m a r k e t area is dominated by
stronger buyers and since, in t h e
absence of i n t e r - c o m m u n i c a t i o n ,
sellers, strengthened by the fact
of shortage, are in a position to
apply discrimination to their
advantage, the average of prices
w i t h i n t h e black m a r k e t area
( w h i c h , according to o u r h y p o t h e sis, exceeds the m a r g i n a l demand
p r i c e ) tends to be higher than the
n o r m a l price as it w o u l d be in a
free m a r k e t . T h e reverse m a y
happen only i f v e r y h i g h penalties
are placed upon black m a r k e t
buyers.
Secondly, the average price in
the legal and the black markets
t a k e n together, depending, as it
does, u p o n the level of c o n t r o l l e d
price, t h e l e v e l of b l a c k m a r k e t
prices and the area covered by
i l l e g a l transactions r e l a t i v e l y to
the open m a r k e t , may easily exceed the n o r m a l free m a r k e t
prise. T h i s tendency becomes a l l
the more l i k e l y if c o n t r o l over
b l a c k m a r k e t dealings is slackened, for, in that case, a larger p r o p o r t i o n of the aggregate o u t p u t
goes i n t o the black m a r k e t area.
T h u s an act of concession to b l a c k
m a r k e t sellers, w h i l e i t m a y b r i n g
d o w n black m a r k e t prices as such,
is altogether n o t c e r t a i n in its
effect o n average p r i c e i n t h e
J a n u a r y 26, 1950
combined area, w h e n account is
t a k e n of its repercussion on the
v o l u m e of o u t p u t available f o r the
'open' area,
equalities are called for as a special incentive measure, as in times
of w a r , — t h e proper r e m e d y for
these excesses is t a x - c u m - s u b s i d y
rather t h a n p r i c e c o n t r o l and
T h i r d l y , since, if the l a w is to rationing? T h e v e r d i c t of Profesbe t a k e n at a l l seriously, the sor, B o b b i n s on this matter is w e l l
objective of p o l i c y m u s t be to stop w o r t h p o n d e r i n g over: " I f i t
black m a r k e t dealings, or, at any is felt that the w o r k i n g of
rate, to reduce t h e i r area to the the m a r k e t results in a dism i n i m u m , it is a matter of i n - t r i b u t i o n of goods w h i c h is
difference w h e t h e r buyers or not equitable, the r e m e d y is to
sellers or b o t h are chosen for be f o u n d , not in suspending the
punishment in respect of these m a r k e t or in falsifying the system
dealings. F o r it is just a question of prices, b u t r a t h e r in direct opeof keeping the demand curve ration on t h e level of net incomes
below the supply c u r v e in the and p r o p e r t y either by w a y of
black m a r k e t region. A n d this o f taxation or by w a y of subsidies to
course can be done either by persons. If it is t h o u g h t that the
pushing d o w n the demand c u r v e r i c h get too m u c h , then t h e y
t h r o u g h penalties on buyers or by should be taxed. If it is t h o u g h t
pushing up the supply
c u r v e that the prices of essential c o m t h r o u g h penalties on sellers. modities are too h i g h for the pocE i t h e r of these operations, if kets of the lowest group of income
c a r r i e d o n successfully, w o u l d receivers, then give t h e m money.
serve the purpose e q u a l l y w e l l Or if it is felt that the poorest
It is f o r the State to decide w h i c h consumers are so s i l l y or so irresw o u l d be more convenient and ponsible that they cannot spend
more effective f r o m the adminis- increased money incomes p r o p e r l y
t r a t i v e point o f v i e w .
either for themselves or ( w h a t is
more i m p o r t a n t ) for their c h i l d L a s t l y , — g i v e n the black m a r k e t ren, then give t h e m income in
supply c u r v e , the higher the k i n d . B u t d o not t h r o w the baby
penalties placed on i l l e g a l b u y i n g out w i t h the bath water by susthe l o w e r surely is the average of pending the m a r k e t or by fixing
prices, b u t t h e smaller also is the prices below the m a r k e t e q u i l i o u t p u t sold i n the black m a r k e t . b r i u m . T h a t w a y lies f r u s t r a t i o n
I f , then, consumers' surplus is and much economic waste."*
taken to be t h e c r i t e r i o n of gain to
buyers—to estimate w h i c h penal* L i o n o l Robbins, The Economic
ties, b o t h actual and potential, as Problem in Peace and War ( M a c also t h e loss of o u t p u t available. m i l l a n , 1947), pp. 8-9.
are to be t a k e n i n t o account,—it
is misleading, under the p r e t e x t of
price r e d u c t i o n , to m a k e a scapegoat of the buyer.
These considerations ' suggest
the sort of d i l e m m a to w h i c h a
policy of p r i c e c o n t r o l and r a t i o n i n g gives rise. If c o n t r o l over the
black m a r k e t is slackened, aggregate o u t p u t expands, b u t t h e legal
m a r k e t is left h i g h and d r y , and
the scheme of r a t i o n i n g is endangered. On t h e other hand, if cont r o l over the black m a r k e t is
tightened, the supply in the legal
m a r k e t expands, b u t the aggregate o u t p u t shrinks, and there is
damage to consumers' surplus.
Does it n o t f o l l o w , therefore,
that,—except w h e r e large i n 100