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The Effect of Price Ceiling and Black Market in Gasoline Market

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Gasoline market is in equilibrium at a price of $3 per gallon and a quantity of 45 million gallon per month in the United States. Then a war in the Middle East disrupts imports of oil into the United States, shifting the supply curve for gasoline from S1 to S2. The price of gasoline begins to rise and consumer protest. The federal government responds by setting a price ceiling of $3 per gallon.

A) The effect of imposing price ceiling in equilibrium price and the quantity demanded is studied. B) The equilibrium price and the equilibrium quantity assuming there is no price ceiling is determined. C) The graph that shows consumer surplus, producer surplus and dead weight loss is illustrated D) The effect of black market in consumer surplus, producer surplus and dead weight loss is analyzed. E) The effect of price ceiling in consumers satisfaction is studied. .

Assuming that there is no price ceiling, the equilibrium price is $4.00 and the equilibrium quantity is 40 million gallons. When the price ceiling is setting at $ 3, the equilibrium price will be dropped to $3 and the quantity demanded will be 45 million gallons if no black market is assumed. The quantity supplied will be 30 million gallons which means that there is shortage of 15 million gallons.

As shown in the below Figure ( ) , A+B+C is representing the Consumer surplus, D represent the producer surplus and E+F represent deadweight loss.

In case of there is a black market, consumers are willing to pay $6.00 per gallon for the amount supplied by producer of gasoline at a price ceiling of $3.00. A represents consumer surplus, B+C+D represents producer surplus and E+F represents deadweight loss.

Some consumers are made better off by the price ceiling because they can purchase gasoline at a lower price than they could. However, some consumers will not be able to find gasoline at a price of $3.00 and will be worse off. Consumer surplus without the price ceiling is A+B+E, but with the price ceiling it could be A + B + C and as it is noticed C is larger than E. The area of E is 1/2 × 10,000,000 × $2.00 = $10,000,000, while the area of C is $1.00 ×x 30,000,000 = $30,000,000.)

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