Supply/Demand of Smuggling I am attempting a (very) basic analysis of smuggling from one economy to the other (Venezuela to Colombia) - arising from price ceilings ceteris paribus. e1 are the equilibria without intervention (price controls), e2 are the equilibria after price ceilings, and e3 show what I assume the markets would look like if Venezuelans supplied Colombia (by smuggling) where the Venezuelans' profit = 

[Colombia p-hat - cost of smuggling - Venezuela p-hat]

The supply curve for Colombia becomes the sum of the Venezuelan and Colombian supply curves above the [Venezuelan price ceiling + cost of smuggling], while there is a movement along the Venezuelan supply curve to the point of [Colombian price ceiling - cost of smuggling].

Is this correct?

Thanks!
You can consider a single competitive firm model with quadratic cost function say $c(y) = \frac{y^2}{2}$. This firm is in Venezuela. Let $\hat{p}_c$ and $\hat{p}_v$ be price ceilings in Colombia and Venezuela respectively. Also, $\hat{p}_c &gt; \hat{p}_v$ indicating the opportunity to smuggle. Also, assume demands are sufficiently high so that the ceilings are binding. Consider competitive suppliers' problem without smuggling:

\begin{eqnarray*} \displaystyle\max_{y\geq 0} &amp;&amp; p_vy - \frac{y^2}{2}\end{eqnarray*}
Solving it, we get the supply curve as $y = p_v$.

Given that the price in Venezuela is $\hat{p}_v$, equilibrium quantity in this case will be $y^* = \hat{p}_v$.

With an option to smuggle with the additional cost say $c(z) = \frac{z^2}{2}$, the profit maximization problem is:
\begin{eqnarray*} \displaystyle\max_{y\geq 0, z \geq 0} &amp;&amp; p_vy + p_cz - \frac{(y + z)^2}{2} - \frac{z^2}{2}\end{eqnarray*}

This gives us the new domestic supply function as:
$y = 2p_v - p_c$

and the quantity smuggled as
$z = p_c - p_v$

So, equilibrium quantity sold in Venezuela has fallen to
$y^{**} = 2\hat{p}_v - \hat{p}_c$ and the quantity smuggled is equal to $z^{**} = \hat{p}_c - \hat{p}_v$.