A NOTE ON THE THEORY OF BLACK MARKETS UNDER PRICE CONTROLS

In a recent article in this Journal Browning and Culbertson (hereafter B-C) extended the theoretical investigation of the predicted effects of maximum price controls to the competitive firm and deduced an excess capacity result. In this note we extend their analysis to derive long-run adjustment paths for the industry for changes in market demand or control prices. The importance of such an extension is that the relevant industry adjustment path is different depending on whether one considers changes in the control price through such mechanisms as cost pass-throughs or through changes in industry demand. To make this extension meaningful, however, we must first consider the link between the firm and market diagrams in B-C's model. Section I is devoted to the analysis. Section II offers some concluding remarks.