Causes of black market

In some cases, when governments or regulatory bodies set a maximum price for a good, this leads to black markets. To be effective, the maximum price has to be below the market price that prevails as a result of the interaction of demand and supply. For example, the market price of wheat is $5. Government is regulating the industry and fixes a price of $4 as the maximum price. Supply of wheat is going to reduce and demand is going to increase based on the laws of demand and supply. This will lead to a shortage as people are demanding more wheat than is being supplied. Some consumers will be willing to pay the original market price for wheat ($5) and some will be willing to pay even higher. This leads to a black market where suppliers will provide the willing consumers with wheat at a price higher than the prevailing one.