Posts Tagged ‘underground economy’

What and where is the black market?

Wednesday, October 7th, 2009

Drugs, guns, stolen goods, oh my! The buying and selling of these types of illegal products is the most infamous type of black market. In a more general sense, the black market is any marketplace that operates outside the law, or disregards trade or taxation regulations. It gets its name from the idea that business is done “in the dark,” out of sight.

As a trend, black markets tend to sprout up most in places with the least economic freedom. This means the countries with the most economic freedom tend to have the smallest black markets (proportionally). But countries with more corruption, regulation, and monopolies have fewer legitimate economic opportunities. For instance, North Korea has a robust black market for basic supplies like food.

In developed countries, black markets form in response to legal, regulatory, and taxation restrictions. One of the most famous examples comes from the 1920s. When prohibition made alcohol illegal in the U.S., it spawned an enormous black market where alcohol was smuggled into the country and sold at speakeasies and private bars. Spearheaded by the mafia, the black market sustained an era of organized crime and cost the U.S. an estimated $500 million in lost tax revenues every year. Economics teaches us about the laws of supply and demand; just because something becomes illegal, for instance, doesn’t mean everyone suddenly stops wanting it. Boom. Black market.