January 26, 1950 E C O N O M I C W E E K L Y

The Theory Of Black Market Prices A. K. Das Gupta

TH E E S S E N T I A L func t ion o f the pr ice mechanism is the

smooth clearance of the available supply in a marke t . An economic good is a good whose supply is scarce in re la t ion to demand,— Scarc i ty ' i m p l y i n g s imply that the ent i re want of the society is not satisfied by the available sup­p ly . In v i e w of the scarcity of supply, buyers press against one another, and those who fa i l to offer the r u l i n g price in the mar­ket go unsatisfied. Pr ice thus measures the s t rength of excluded demand,—being de termined by the degree of scarcity of supply re la t ive ly to the marke t demand. In a free price system, excess de­mand or excess supply are r u l e d out. Excess demand is a signal for a pr ice rise, and excess supply is a signal for a pr ice f a l l . C o m ­pet i t ion among buyers and sellers brings it about that a pr ice is set­t led in the marke t at w h i c h de­mand is equated to the supply. The available supply is taken off the marke t by those buyers who are r e l a t ive ly stronger and are prepared to offer the r u l i n g price; those who cannot afford to pay the r u l i n g pr ice go unsatisfied. The s t rength of the buyers as ex­pressed in the marke t depends not mere ly upon the degree of wil l ingness to have a good, bu t also upon the capacity to pay for i t .

The price at wh ich demand is equated to the supply is cal led by economists the no rma l pr ice . In a free market , demand and supply forces can be re l ied on to secure the establishment of a n o r m a l price and to ensure the smooth disposal of a commodi ty . Each has the r i g h t to b i d his o w n price for the commodi ty that he wants, and if the pr ice offered satisfies the seller, the deal is f inished w i t h ­out more ado. On the other hand, however intense the need that he may feel for a commodi ty , i t re­mains unsatisfied unless i t is back­ed by the powe r -to pay a pr ice w h i c h w i l l satisfy the seller. The

free price system is thus a de l i ­cate mechanism t h r o u g h which are avoided a l l k inds of manoeuvr-ings that w o u l d otherwise appear in society as a resu l t of the pres­sure of demand upon scarce supply.

Ye t there is jus t one l i m i t a t i o n of the free pr ice system, however satisfactory i t m i g h t be in respect of the smooth de l ive ry of goods. The system caters to the wants of stronger members of the society at the expense of its weaker mem­bers. A n d since this s t rength 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 bu t ion of a good, as it takes place t h r o u g h the marke t mechanism, tu rns out to be in accordance w i t h the re la t ive ' income' of the citizens ra ther than in accordance w i t h the i r re la t ive needs. A n d in a society w h i c h is characterised by large inequa l i ­ties of income, this l i m i t a t i o n proves a serious l i m i t a t i o n .

This is the sanction for price cont ro l . I f the n o r m a l pr ice is found too h igh for the poorer section of the c o m m u n i t y and i f it is felt that they should also be a l lowed to have a share of the available supply of a commodi ty , 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 pr ice be low ' no rma l ' is fixed and sellers are coerced in to accepting what is deemed to be the m a x i m u m al lowable , consist­en t ly w i t h the demand coming f rom the re la t ive ly poor.* A pr ice f ixed below n o r m a l does b r i n g the cont ro l led good w i t h i n the reach of the h i the r to unsatisfied buyers, a l though in do ing so, i t deprives the stronger buyers of a share tha t w o u l d , in the absence of cont ro l , belong to them. I f the con t ro l is j ud ic ious ly and effec­t i v e l y adminis tered, i t may under

* The opposite case,—that of f ixing a m i n i m u m price,—is not re levant to ou r present p rob lem and is therefore r u l e d out.

cer ta in circumstances lead to a mare desirable d i s t r ibu t ion of the available supply.

There is, however , one aspect of the mat ter wh ich must not be lost sight of. The l i m i t a t i o n of the free pr ice system that we have mentioned-arises out of large i n ­equali t ies of income. It is be­cause of this inequal i ty that the no rma l pr ice fails to satisfy the general need of the society to the extent deemed desirable. N o w , i f this p rob l em of inequa l i ty can be tackled d i rec t ly , t h rough taxes and subsidies, or t h rough other measures of general income con­t r o l , the case for pr ice control surely disappears. I f the income ra t io between different groups in the society is b rought down to the leve l that is considered desir­able, the free pr ice system surely comes in to its own . In p r inc ip le , indeed, this is a surer way of achieving the objective that we have in v i ew. Whereas an over­a l l income cont ro l relieves the State of the necessity of looking into i n d i v i d u a l markets , the p r i n ­ciple of pr ice cont ro l , since i t 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 na ture de­pending upon the character of the m a r k e t and the number of com­modit ies to be control led .

W h a t happens if the pr ice of a commodi ty is fixed by the State at a leve l be low what i t w o u l d be under the free play of the forces of demand and 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 shor t of that w h i c h the buy­ers are w i l l i n g to b u y at the given price. The marke t thus expe­riences 'shortage' w h i c h is to be dist inguished f r o m 'scarci ty ' pros­per. For , whereas 'scarcity ' de­notes mere ly tha t some demand is excluded because the buyers can­not afford to pay the r u l i n g price, 'shortage' indicates that even those buyers w h o are will ing to pay a pr ice acceptable to the

97

January 26, 1950 E C O N O M I C W E E K L Y

The Theory Of Black Market Prices A. K. Das Gupta

'HE ESSENTIAL funct ion of the pr ice mechanism is the

smooth clearance of the available supply in a marke t . An economic good is a good whose supply is scarce in r e l a t ion to demand,— 'scarcity ' i m p l y i n g s imply tha t the ent i re wan t of the society is no t satisfied by the available sup­p ly . In v i ew of the scarcity of supply, buyers press against one another, and those w h o fa i l to offer the r u l i n g price in the mar­ke t go unsatisfied. Pr ice thus measures the s trength of excluded demand, - b e i n g de termined by the degree of scarcity of supply re l a t ive ly to the marke t demand. In a free price system, excess de­mand or excess supply are ru l ed out . Excess demand is a s ignal for a price rise, and excess supply is a signal for a pr ice f a l l . Com­pe t i t ion among buyers and sellers br ings it about that a pr ice is set­t l ed in the marke t at w h i c h de­mand is equated to the supply. The available supply is t aken off the marke t by those buyers who are re la t ively stronger and are prepared to offer the r u l i n g pr ice ; those who cannot afford to pay the r u l i n g pr ice go unsatisfied. The s t rength of the buyers as ex­pressed in the marke t depends no t mere ly upon the degree of wil l ingness to have a good, b u t also upon the capacity to pay for i t

The price at wh ich demand is equated to the supply is cal led by economists the n o r m a l pr ice . In a free market , demand and supply forces can be re l ied on to secure the establishment of a no rma l pr ice and to ensure the smooth disposal of a commodi ty . Each has the r i g h t to b id his o w n pr ice for the commodi ty that he wants , and if the pr ice offered satisfies the seller, the deal is f inished w i t h ­ou t more ado. On the other hand, however intense the need that he may feel for a commodi ty , I t r e ­mains unsatisfied unless i t is back­ed by the pow e r -to pay a pr ice w h i c h w i l l satisfy the seller, The

free pr ice system is thus a de l i ­cate mechanism t h r o u g h w h i c h are avoided a l l k inds of manoeuvr-ings that w o u l d o therwise appear in society as a resul t of the pres­sure of demand upon scarce supply.

Ye t there is jus t one l i m i t a t i o n of the free price system, however satisfactory i t m i g h t be in respect of the smooth d e l i v e r y of goods. The system caters to the wants of stronger members of the society at the expense of its weaker mem­bers. A n d since this s t rength ex­presses itself, p a r t l y at any rate, in terms of the capacity to pay, the d i s t r ibu t ion of a good, as it takes place t h r o u g h the m a r k e t mechanism, tu rns ou t to be in accordance w i t h the re la t ive ' income' of the citizens ra ther than in accordance w i t h the i r re la t ive needs. A n d in a society w h i c h is characterised by large inequa l i ­ties of income, th is l i m i t a t i o n proves a serious l i m i t a t i o n .

Th i s is the sanction for pr ice cont ro l . I f the n o r m a l pr ice i s found too h igh for the poorer section of the c o m m u n i t y and i f it is felt that they should also be a l lowed to have a share of the available supply of a commodi ty , 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 be low ' no rma l ' is fixed and sellers are coerced in to accepting wha t is deemed to be the m a x i m u m al lowable , consist­ent ly w i t h the demand coming f rom the r e l a t ive ly poor.* A pr ice f ixed below n o r m a l does b r i n g the control led good w i t h i n the reach of the h i the r to unsatisfied buyers , a l though in do ing so, i t deprives the stronger buyers of a share tha t w o u l d , in the absence of cont ro l , belong to t hem. I f the con t ro l is jud ic ious ly and effec­t i ve ly adminis tered, i t may under

* The opposite case,—that of fixing a m i n i m u m price,—is no t re levant to o u r present p rob lem and is therefore r u l e d out .

cer ta in circumstances lead to a more desirable d i s t r i b u t i o n of the available supply.

There is, however , one aspect of the mat te r wh ich must not be lost sight of. The l i m i t a t i o n of the free pr ice system that we have mentioned-arises out of large in ­equalit ies of income. It is be­cause of this inequa l i ty tha t the n o r m a l pr ice fails to satisfy the general need of the society to the extent deemed desirable. N o w , i f this p r o b l e m of inequa l i ty can be tackled d i rec t ly , t h rough taxes and subsidies, or t h rough other measures of general income con­t r o l , the case for price control surely disappears. I f the income rat io between different groups in the society is b rough t d o w n to the leve l tha t is considered desir­able, the free pr ice system surely comes in to its o w n . In pr inc ip le , indeed, this is a surer w a y of achieving the objective that we have in v i ew. Whereas an over­a l l income con t ro l relieves the State of the necessity of look ing into i n d i v i d u a l markets , the p r i n ­ciple of pr ice cont ro l , since i t 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 na ture de­pending upon the character of the marke t and the number of com­modit ies to be control led.

What happens if the price of a commodi ty is fixed by the State at a level be low what i t w o u l d be under the free play of the forces of demand and 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 the l a y ­ers are w i l l i n g to b u y at the g iven pr ice . The m a r k e t thus expe­riences 'shortage' w h i c h is to be dist inguished f r o m 'scarci ty ' pros­per. For , whereas 'scarcity ' de­notes mere ly tha t some demand is exc luded because the buyers can­no t afford to pay the r u l i n g pr ice, 'shortage' indicates that even those buyers w h o are w i l t i n g to pay a pr ice acceptable to the

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E C O N O M I C W E E K L Y Janua ry 26, 1950

sellers m a y have to go unsatis­fied. Scarci ty is ub iqu i tous in t h e exchange economy; the fact that a pr ice is to be pa id at a l l is an ind ica t ion tha t scarcity exists. Shortage, on the other hand, is the outcome of an a r t i f ic ia l con t ro l w h i c h puts a b rake on supply b u t at the same t ime releases a de­m a n d w h i c h otherwise w o u l d re­ma in subdued.

H o w is this short supply dis­t r i b u t e d among the in tend ing buyers? Does i t go to those w h o come first , or to those w h o are physica l ly stronger and can push others out of the marke t? O b v i ­ously any such processes w o u l d frustrate the object of pr ice con­t r o l The technique o f r a t i on ing is thus the essential coro l la ry of a system of pr ice cont ro l . The con t ro l l ing a u t h o r i t y undertakes to arrange a d i s t r i bu t i on of wha t ­ever supply is available at the legal price among the in t end ing buyers according to the i r re la t ive needs. Th i s obvious ly means that , a l though people 'at the bot­t o m of the scale' get a par t of t he i r demand satisfied, those at the upper end of the scale are asked to accept a ra t ion smaller t han wha t , w i t h the i r stronger pu r ­chasing power , they could secure in a free marke t by b i d d i n g up prices. Here , therefore, are b u y ­ers eager to pay h igher prices for an ex t ra supply and sellers equa l ly eager to swi t ch on to the stronger m a r k e t i f on ly such a m a r k e t can be created. Thus the emergence of the so-called 'black marke t ' is the inevi table conse­quence of pr ice con t ro l and ra t ion ing . Because there are b u y ­ers p repared to b u y at h igher prices more than the i r r a t ion coupons a l low, and because there are sellers to w h o m the commer­c ia l code ra ther t h a n the l a w of the l and is supreme, and w h o are therefore anxious to sel l the i r good to the highest bidder , an area tends i nev i t ab ly to develop over w h i c h transactions take place at prices h igher t h a n the legal max imum,—i t s extent de­pending upon the degree of super­v i s ion exercised by the state towards the enforcement of l a w .

H o w are b lack m a r k e t prices d e t e r m i n e d " D o they t end t o b e

lower than the n o r m a l pr ice as i t w o u l d be in a free marke t? W h a t tends to be the ou tpu t of a commo­d i t y tha t f i nds i t s w a y in to b lack markets? Does i t exceed, or f a l l short of the n o r m a l ou tpu t? Th i s is a n e w f ie ld of e n q u i r y w h i c h has opened up in the wake o f w a r and post-war p r i ce controls and ra t ion ing . For , since these con­t ro ls have been in t roduced, b lack marke t s have been a common phenomenon almost everywhere .

N o t enough has ye t been done, i t appears, by our economists to analyse the affairs of the b lack markets . We have h a d a l o t of discussion concerning the d i f f i cu l ­ties a r i s ing f r o m the hetero­geneity of products w i t h i n the same indus t ry , differences in the costs of different firms, vague­ness of the needs of consumers, etc. We have also been t o ld about the possible fa i lu re of pr ice con­t r o l measures in v i e w of the i l l ega l transactions tha t 'shortages' w o u l d inev i t ab ly ca l l f o r t h . B u t the ac tual operations of the black markets , inspite of t he i r w i d e p re ­valence, have been left p rac t ica l ly alone. B u t n o t en t i re ly . A p a r t f r o m a few J o u r n a l art icles to w h i c h the present w r i t e r cou ld

no t have access, K e n n e t h E. Bou ld ing ' s Economic Analysis contains an ingenious t h e o r y of b lack m a r k e t prices, a l though even here, as t he present paper pu rpor t s to show, the mat te r has been presented in too simpliste a fashion and the essential character of the phenomenon has been lost sight of.

The f o l l o w i n g d iagram is the basis of Bould ing ' s analysis.1

D and S represent the n o r m a l demand and supply curves as they w o u l d be in the absence of con­t r o l . PN w o u l d then be the nor ­ma l pr ice, and ON the amount bought and sold. I f , now, OR is f ixed 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 and sel l ing are legal ly a l lowed, the quan t i t y suppl ied comes d o w n to RT and the quan t i t y demanded goes up to R V . To re l ieve the congestion of demand, the com­m o d i t y i s ra t ioned. B u t since the available supply in the legal mar-r ke t is on ly RT, many w i l l i n g buyers go unsatisfied, and an i l legal m a r k e t develops. W h a t are the demand and supply con­di t ions in this i l l ega l marke t? Here i s Bould ing ' s o w n s tory :

Janua ry 26, 1950 E C O N O M I C W E E K L Y

" W e can postulate a 'b lack m a r k e t supp ly curve ' , TSB l y i n g to the l e f t o f t h e n o r m a l supply cu rve TS. As operations in the b l ack m a r k e t invo lve a cer ta in r i s k above w h a t w o u l d be necessary in a free marke t , suppliers are n o t t o be found w i l l i n g to supply as m u c h a t each pr ice in the b l ack m a r k e t as w o u l d be done in the f r ee marke t ; in other words , be­cause of the h igher costs i t n o w takes a higher pr ice to ca l l f o r t h any g i v e n quan t i t y than i t d i d before. The h igher the costs of b lack marke t operat ion, t he steeper w i l l TSB rise. We can s i m i l a r l y postulate a b l ack m a r k e t demand curve , T 'Db. Even a t the legal m a x i m u m pr ice (OR) we m a y suppose tha t not a l l po ten t ia l buyers are w i l l i n g to b u y in the b lack marke t , so that the quan­t i t y demanded in the b lack m a r ­k e t at the price OR is no t the t o t a l unsatisfied demand quan t i ty , T V . b u t a smaller q u a n t i t y TDb . . . . T h e n the b lack m a r k e t price i s P 1 ,N 1 and the q u a n t i t y bought and sold in the black m a r k e t is TK, RK be ing the to t a l q u a n t i t y in the legal and the b lack m a r k e t com­bined , and RT the quan t i t y in the legal marke t . " I t i s fu r the r a rgued that in case " there are no penalties of any k i n d , legal or m o r a l , attached to purchases in the b lack market , the black mar­k e t demand curve w i l l b e the same as the n o r m a l demand curve , DP2, so that , w i t h TSB as the black m a r k e t supply curve , the b lack marke t pr ice w i l l be as h i g h as P2N2 . On the other hand , i f suppliers are unmolested and penalties are placed on ly on b lack marke t buyers , the b l ack m a r k e t pr ice w i l l be as l ow as

B o u l d i n g derives the fo l l owing conclusions f r o m his analysis of the b l ack marke t :

F i r s t , the b lack m a r k e t p r i ce m a y be less t h a n the n o r m a l p r ice as i t w o u l d be in a free marke t ; P1N1, as the d iagram shows, is less t h a n P N . Secondly, the aver­age p r i ce in the legal and the b lack marke t together i s l i k e l y to be less than the n o r m a l pr ice , so t h a t "even i f a b lack m a r k e t deve­lops as a resul t of p r ice con t ro l

t h e resu l t ing average pr ice is less t h a n tha t w h i c h w o u l d have obta ined in a perfec t ly free mar ­ket ." A n d t h i r d l y , the more r igorous are the measures taken against the b lack m a r k e t buyers t he lower i s the b l ack m a r k e t p r ice , and the larger the penalties placed on sellers, the h igher is the b lack m a r k e t price,—the inference f r o m this being that "other th ings be ing equal, i t w o u l d be bet ter to penalize the buyers ra ther than the sellers in the b lack marke t , the housewife ra ther than the grocer. ' '

W h i l e the above analysis raises ce r t a in interest ing issues, the manner in w h i c h t he p rob l em i s hand led leaves room for fu r the r reflect ion. In general, the exten­s ion 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 logica l ly untenable b u t is also misleading in i ts implicat ions. To an exami ­na t i on of this we shal l now t u r n .

In the f i r s t place, i t i s w r o n g to take the unobst ructed black mar­ke t demand curve to be j u s t an extension of the o r ig ina l D— curve . I t mus t be remembered that, according to hypothesis, the legal supply, RT, is sold at the cont ro l led price, OR, and is thus open to buyers w i t h i n the range PV equal ly w i t h the buyers be­longing to the upper range. I f , then, a par t of the amount sold in the legal m a r k e t i s t aken away by buyers l y i n g be low the range RT, the demand curve in the b lack marke t , in the absence of penal ­ties, gets shifted above DP2. T h e stronger buyers 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 the black marke t and offer a p r i ce w h i c h i s h igher than i s shown in the o r ig ina l demand curve. Neg­lect ing obstacles to demand, there­fore, the po in t T 1 i nva r i ab ly lies ve r t i c a l l y above the D—curve .

As regards the black m a r k e t supp ly curve , i f r i sks at tend b lack m a r k e t sel l ing, th is curve shou ld l ie above the S—curve over i t s who le length , the distance bet­ween the t w o curves depending u p o n the marg ina l r isk-cost asso­ciated w i t h increasing sales i n t he

b l ack marke 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 be paral lel . I f , on the other hand, as is more l i k e l y , the sellers are af ra id that exten­s ion of sales in the black marke t w i l l invo lve w i d e r pub ic i ty and increasing r i sk of detection, the distance between the t w o curves w i l l g row w i d e r as they move to t he r i gh t . In any case, the i n i t i a l p o i n t on the black marke t supply c u r v e w i l l be ve r t i ca l ly above T. Fu r the r , the amount sold in the legal marke 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 upon the degree of res t r i c t ion that is placed upon black marke t sell ing. RT is ce r ta in ly the m a x i m u m amount tha t can be sold at the con t ro l l ed pr ice , OR. Ye t i t may not be the actual amount released in the open marke t at that price, since the black markets w o u l d promise a higher r e t u r n . To wha t extent ou tpu t w h i c h could prof i tably be sold in the legal marke t w o u l d nevertheless disappear in to the d a r k area w i l l depend u p o n the 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 i s by far the most impor tan t po in t about the whole matter ,—the so-called b lack 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 a t a l l . The i l legal character of the transactions na tu ra l ly precludes the possibi l i ty of that degree of in te r -communica t ion between buyers and sellers w h i c h makes for a perfect marke t w i t h a u n i ­f o r m price. By its ve ry na tu re , the black market , such as it is, is a t best an imperfect i n s t i t u t i on in w h i c h i n d i v i d u a l buyers and sellers are, so to say, pa i red , a n d separate prices tend to evolve in respect of the same commodi ty , —the leve l in each case depending upon the re la t ive s t rength of -the parties. To t a l k of the black mar-k e t price, de te rmined at the point o f intersect ion between the b lack m a r k e t demand and supply curves, is thus i l leg i t imate . Indeed the theory tha t is relevant here is r a the r t ha t of imperfect m a r k e t a n d d i sc r imina t ion , and the tech­n i q u e tha t is appropriate is that of m a r g i n a l revenue and marg ina l

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E C O N O M I C W E E K L Y J a n u a r y 26, 1950

cost, T h e in tersect ion between ' the b lack m a r k e t demand and supp ly curves may point to a m i n i m u m price a t w h i c h a parce l of p roduc t might be sold p ro f i t ­ab ly , due account be ing taken of the r isks of such sales; i t does no t indicate the average pr ice at w h i c h the b lack marke t o u t p u t is actually sold. T h u s even if the b lack m a r k e t supply cu rve cuts the black m a r k e t demand c u r v e at P1 (as shown in the dia­g r a m ) , the amount bought and sold in the area w i l l not be neces­sar i ly ON1 nor w i l l the average pr ice be necessarily P 1 N 1 . Since some degree of d i sc r imina t ion w i l l be possible, the average revenue curve w i l l sure ly l ie above T'Db.

W h a t does a l l th is lead to? H o w are our generalisations concerning b lack marke ts affected by these considerations?

In the first place, since the b lack marke t area is dominated by stronger buyers and since, in the absence of in te r -communica t ion , sellers, strengthened by the fact of shortage, are in a posi t ion to apply d i sc r imina t ion to t h e i r advantage, the average of prices w i t h i n the black m a r k e t area ( w h i c h , according to our hypothe­sis, exceeds the marg ina l demand pr ice) tends to be higher than the n o r m a l price as it w o u l d be in a free marke t . T h e reverse may happen only i f v e r y h i g h penalties are placed upon black marke t buyers.

Secondly, the average price in the legal and the black markets taken together, depending, as i t does, upon the level of cont ro l led pr ice, the leve l of b lack marke t prices and the area covered by i l l ega l transactions re la t ive ly to the open market , may easily ex­ceed the n o r m a l free marke t prise. This tendency becomes a l l the more l i k e l y i f cont ro l over b lack marke t dealings is slacken­ed, for, in that case, a larger pro­po r t i on of the aggregate ou tpu t goes in to the black m a r k e t area. Thus an act of concession to b lack marke t sellers, w h i l e i t may b r i n g d o w n black marke t prices as such, i s altogether no t cer ta in in i ts effect on average pr ice in the

combined area, when account is taken of its repercussion on the vo lume of ou tpu t available for the 'open' area,

T h i r d l y , since, i f the l aw is to be taken at a l l seriously, the objective of po l icy mus t be to stop black marke t dealings, or, at any rate, to reduce the i r area to the m i n i m u m , i t is a mat ter of i n ­difference whe the r buyers or sellers or bo th are chosen for punishment in respect of these dealings. Fo r it is just a quest ion of keeping the demand curve below the supply curve in the black marke t region. A n d this of course can be done either by pushing d o w n the demand curve t h r o u g h penalties on buyers or by pushing up the supply curve t h r o u g h penalties on sellers. Ei ther of these operations, i f ca r r ied on successfully, w o u l d serve the purpose equal ly w e l l I t is for the State to decide w h i c h w o u l d be more convenient and more effective f rom the adminis­t r a t i ve point of v i ew .

Las t ly ,—given the black marke t supply curve , the higher the penalties placed on i l legal b u y i n g the lower surely is the average of prices, bu t the smaller also is the ou tpu t sold in the black marke t . I f , then, consumers' surplus is taken to be the c r i t e r ion of gain to buyers—to estimate w h i c h penal­ties, b o t h actual and potent ia l , as also the loss of ou tpu t available. are to be taken in to account,—it is misleading, under the pre tex t of price reduct ion , to make a scape­goat of the buyer.

These considerations ' suggest the sort of d i l emma to w h i c h a pol icy of pr ice con t ro l and ra t ion­ing gives rise. I f con t ro l over the b lack marke t is slackened, aggre­gate ou tpu t expands, bu t the legal m a r k e t is left h igh and d r y , and the scheme of r a t ion ing is endan­gered. On the other hand, i f con­t r o l over the black marke t i s t ightened, the supply in the legal m a r k e t expands, b u t the aggre­gate ou tpu t shr inks , and there is damage to consumers' surplus.

Does i t no t fo l low, therefore, that,—except whe re large i n ­

equalit ies are cal led for as a spe­cia l incent ive measure, as in t imes of war ,—the proper remedy for these excesses is tax-cum-subsidy rather than pr ice con t ro l and ra t ioning? The verd ic t of Profes­sor, Bobbins on this mat ter is w e l l w o r t h ponder ing over: " I f i t is felt that the w o r k i n g of the marke t results in a dis­t r i b u t i o n of goods w h i c h is not equitable, the remedy is to be found, not in suspending the marke t or in fa ls i fying the system of prices, b u t ra ther in direct ope­rat ion on the level of net incomes and proper ty ei ther by way of taxat ion or by way of subsidies to persons. If i t is thought that the r i c h get too much , then they should be taxed. If i t is thought that the prices of essential com­modit ies are too h igh for the poc­kets of the lowest group of income receivers, then give them money. Or if i t is felt that the poorest consumers are so s i l ly or so i r res­ponsible that they cannot spend increased money incomes p r o p e r l y ei ther for themselves or ( w h a t is more impor tan t ) for the i r c h i l d ­ren, then give them income in k i n d . B u t do not t h row the baby out w i t h the bath water by sus­pending the marke t or by fixing prices below the market e q u i l i ­b r i u m . Tha t way lies f rus t ra t ion and much economic waste."*

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* L i o n o l Robbins, The Economic Problem in Peace and War (Mac-mi l l an , 1947), pp. 8-9.