When a government imposes penalties on both sellers and buyers of an illegal good, the price of the good _______ and the quantity _______.

Question

Quizplus · Accepted Answer

When a government imposes penalties on both sellers and buyers of an illegal good, it increases the risk and potential cost for both parties involved in the transaction. This can lead to a decrease in supply (as sellers may exit the market or reduce their activity due to the increased risk of penalties) and a decrease in demand (as buyers may also reduce their purchasing activity due to the increased risk and cost). The combination of these effects can lead to a decrease in the quantity of the good traded. However, the effect on price is uncertain and can vary depending on the relative changes in supply and demand. The price might rise if the decrease in supply is greater than the decrease in demand, fall if the decrease in demand is greater than the decrease in supply, or not change significantly if the supply and demand changes are relatively balanced.

When a Government Imposes Penalties on Both Sellers and Buyers