Black Markets and Rationing

What happens when prices are not allowed to balance supply and demand, from queues and ration cards to illegal resale markets.

When prices are held below the level where supply equals demand, for example by law, more people want the good than can get it. Something other than price must decide who gets it. This leads to rationing and often to black markets.

Ways of rationing

When prices cannot rise, goods may be allocated by:

Queues: first come, first served. People pay with time instead of money.
Ration cards or quotas: each household is allowed a fixed amount.
Lotteries: random allocation.
Connections or favouritism: goods go to people with influence.

Black markets

A black market arises when goods are sold illegally at prices above the legal limit. Buyers who value the good highly are willing to pay more, and some sellers or resellers supply them.

Black markets are common where:

Prices are strictly controlled.
Goods are rationed.
Products are banned or heavily taxed.

Examples

Wartime rationing: during the world wars, rationed goods like sugar and meat were often sold on black markets.
Concert and match tickets: when tickets are priced below what fans will pay, touts resell them at much higher prices.
Railway tickets: in India, demand for tickets on popular routes at festival times often far exceeds supply, and touting has been a long-standing problem, leading to rules and technology to limit bulk booking.

A popular cricket match

Tickets for a major cricket match are sold at 2,000 rupees, but thousands more fans want to attend than there are seats. Tickets sell out in minutes, and some resurface on resale markets for 10,000 rupees or more. The fixed price did not match demand, so a secondary market emerged to allocate tickets to those willing to pay most.

Costs of rationing

Economists point out that rationing by queues wastes time, black markets reward rule-breaking and can involve fraud, and goods may not reach those who value them most. Yet societies sometimes choose non-price rationing for fairness, as with essential food in a crisis.

Thinking price controls make goods cheaper for everyone

A low official price helps those who get the good, but many others may get nothing, pay black market prices or waste time in queues. The true cost of the good is often higher than the official price suggests.

Key takeaways

When prices are held below equilibrium, goods must be rationed by other means.
Queues, ration cards, lotteries and connections are common rationing methods.
Black markets arise when goods are sold illegally above legal prices.
Rationing has costs, but societies sometimes choose it for fairness.