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

• 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

• 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 above-ground

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 MarketsGoods 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 law-

abiding citizens.