Suppose that government places a ceiling on the price of a medical drug below the equilibrium price.

a. Show why there is a shortage of the medical drug at the new ceiling price.

b. Suppose that a black market for the medical drug arises, with pharmaceutical firms secretly selling the drug at higher prices. Illustrate the black market for this medical drug, including the implicit supply schedule, the ceiling price, the black market supply and demand, and the highest feasible black market price.

Price ceiling imposed. It implies the maximum price is fixed such that it is below equilibrium price.

There exists a black market.

Since, a ceiling price i.e. maximum price is imposed below the equilibrium price, quantity demanded will exceed the quantity supplied. This will lead to a shortage at the new ceiling price.

Let following be the assumed black market demand and supply schedule:

a)

$700 is the market clearing price, but lets say price ceiling is imposed at $650. Then, there is an excess demand of 2500-1800= 700. Hence, there is a shortage.

b)

Say, black market price is when the quantity is sold at a controlled high price than the equilibrium market. Say, $750 here. Quantity supplied will exceed demand by 700 due to 2200-1500= 700.

The highest black market as per the assumed schedule is 800, with an excess supply of 1400.