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Author Question: When the government passes a law making a particular good illegal, does it matter for the black ... (Read 38 times)

Metfan725

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on: Jun 29, 2018
When the government passes a law making a particular good illegal, does it matter for the black market price and quantity if the penalties for breaking the law are imposed on the buyers or on the sellers?
 
  What will be an ideal response?

Question 2

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  A) creates moral hazard but eliminates adverse selection.
  B) creates adverse selection but eliminates moral hazard.
  C) creates both moral hazard and adverse selection.
  D) eliminates both moral hazard and adverse selection.


akudia

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Reply #1 on: Jun 29, 2018
Answer to Question 1

Yes, it matters. Imposing penalties on the buyers shifts the demand curve leftward. Imposing penalties on the sellers shifts the supply curve leftward. Either penalty decreases the quantity, but the black market price will exceed the legal market price if only the seller is penalized and will be below the legal market price if only the buyer is penalized.

Answer to Question 2

C


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