IBus.380
Black Markets
The Black Market
• AKA Underground Economy
• AKA Grey Economy
• AKA Parallel Market
• AKA the Shadow Economy
• AKA the Underground Economy
The Black Market
• The informal sector or informal economy
• Economic activity that takes place outside
government-sanctioned channels.
• That part of an economy that is not taxed,
monitored by any form of government or
included in any gross national product (GNP),
unlike the formal economy.
Black Markets
A market in which goods or services are traded
illegally.
That is, the transaction itself is illegal although
the goods or services themselves may or may
not be illegal to own.
Black markets skew economic data, as
transactions are unrecorded.
Black Markets
Associated idioms include:
"under the table",
"off the books“
"working for cash"
Informal Sector
• Although it makes up a significant portion of
the economies in developing countries, it is
often stigmatized as troublesome and
unmanageable.
• However the informal sector provides critical
economy opportunities for the poor and has
been expanding rapidly since the 1960s.
Informal Sector
Largely characterized by several qualities:
• easy entry, meaning anyone who wishes to
join the sector can find some sort of work
which will result in cash earnings,
• a lack of stable employer-employee
relationships,
• a small scale of operations,
• skills gained outside of a formal education.
Informal Economy
• The type of work involved is diverse,
particularly in terms of capital invested,
technology used, and income generated.
• The most prevalent types of home-based
workers and street vendors.
Most Commonly Traded Black Market
Items
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currency
electronics and watches
fashion goods (perfumes, jewelry and bags)
clothes and accessories
pirated media (CDs and DVDs for music, films and
software)
• drugs
• alcohol
• tobacco
More Serious and Lesser-Known Black
Markets
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human organs,
endangered species,
babies,
weapons
slave labor (human trafficking).
Why Black Markets Exist
• People want to exchange goods or services
that are prohibited by governments.
• People don't want to pay taxes on the
transaction for legal or illegal goods or
services.
Why Black Markets Exist
• Sometimes participants in black markets don't
want to act illegally, but because they lack the
ability to work legally and need to make money,
they don't report their jobs or income to the
government.
• Such situations arise when illegal immigrants
obtain jobs, when students traveling abroad
obtain employment without acquiring a work visa
or when children work in violation of minimum
age requirements.
Why Black Markets Exist
• Governments can also cause black markets
through overregulation.
• An extreme example: Cuba. Rationing and
ineffective central planning of communism make
it difficult to purchase desired quantities of even
basic products such as cooking oil.
• Black markets are rampant because citizens want
to buy things that are difficult to come by
through legal channels.
• They're also common because it's so hard to find
a job.
Why Black Markets Exist
• High unemployment can give rise to black
markets.
• When workers can't find jobs in the aboveground economy, they may turn to jobs in the
underground economy.
• These jobs could be as innocuous as fixing a
neighbor's toilet (but being paid in cash and not
reporting the income to the tax authorities) or as
serious as selling cocaine (where not only the sale
of the product itself, but also the non-reporting
of taxable income, is illegal).
Why Black Markets Exist
• Corruption, shortages and monopolies also act as
catalysts for the black market.
• They are further encouraged by periods of war or
any other crisis.
• During harsh political conditions or natural
disasters, scarce goods are rationed by the
government.
• People have the tendency to violate restrictions
or rationing laws to secure the products they
desire.
Black Markets
• Many former soviet countries experienced a
huge growth in the black market after the fall
of Communism.
• Communist economies tended to be highly
regulated and so when the regulation fell
away it created a gap for new ‘entrepreneurs’
to meet basic supply and demand.
How do black markets affect the supply of
goods?
– Consumers who are willing/able to pay will move
into the black market;
– Demand for the good will increase along with the
black market price;
– Suppliers will divert more of the product onto the
black market in order to make more money;
– Shortages will be exacerbated in the legal market.
Some people prefer to buy items from the legal
market, even at a higher price. The reasons for
this could be:
• the black market may not provide proper
documents (invoice, licenses, instruction
manuals)
• unwillingness to support an unlawful actnowhere
to turn to if the products do not perform as
promised
• brands may be fake
• no after sales support
The Case for Black Markets
• Black markets can provide legal necessities
that are in short supply, as in the case of
everyday Cuba or a city hit by a hurricane.
The Case for Black Markets
• The shadow economy makes it possible for
people to earn a living who would otherwise
be destitute or seek welfare - people who
would be perfectly employable under less
government regulation or in an economy with
a higher employment rate.
The Case Against Black Markets
Goods are stolen from legitimate markets, taking
business away from law-abiding entrepreneurs.
• While some consumers might not mind buying a
stolen designer handbag at a discount, others
would be appalled if they knew that they were
really supporting an organized crime ring.
• There is often a dark side to organized crime that
goes beyond theft and the resale of stolen
goods. This and other black market activities are
sometimes used to fund terrorism since the
profits can't easily be traced.
The Case Against Black Markets
Violence.
• Because these markets are unregulated,
participants can't rely on legitimate police
protection in the event of theft or other crimes.
• If a drug dealer's stash of methamphetamines is
stolen by a rival dealer, he can't ask the police to
help him get his merchandise back. The dealer
might send one of his employees to shoot the
thief and reclaim the stolen goods, compounding
the effects of the original crime.
The Case Against Black Markets
Their participants don't pay taxes.
• Hence, a heavier tax burden falls on lawabiding citizens.