What is the Black Market?

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Definition:

A black market is a segment of a country’s economy where goods and services are bought and sold illegally.

🤔 Understanding the Black Market

Black market transactions – either virtual or physical – typically are motivated by the desire to avoid governmental rules and regulations, such as taxes, price controls, and laws regarding the sale of contraband. In a black market – sometimes called the shadow economy – either the products for sale or the transaction itself is illegal. Often, the products people buy and sell on the black market are illicit goods such as drugs and weapons, but that’s not always the case. It could also be that the product is perfectly legal, but the manner in which it's being sold is illegal. For example, this would be the case if someone repaired and sold used cars as an underground business. While black markets might provide consumers the opportunity to buy products that they can’t get elsewhere – such as a life-saving medicine – these markets are dangerous because there are no consumer protections in place.

Example

While we often associate the black market with illicit products like illegal drugs and weapons, there can be a black market for almost any product. As long as the product, transaction, or both are illegal, then that activity is considered to be part of the black market. For example, suppose that someone starts an informal business selling bootlegged movies out of their home. They illegally download movies from the internet, burn them onto DVDs, and sell them both online and to friends. Because the seller didn’t obtain the rights to these movies legally and they aren’t reporting that income to the government, these transactions are taking place on the black market.

Takeaway

The black market is kind of like selling the best part of your lunch in elementary school…

Think back to elementary school when you would show up with the lunch that your parents had packed for you. Imagine that, one day, you had the most coveted snack in your lunchbox that everyone wanted – In fact, a few kids even offered you some pocket change for the treat. You’d been begging your parents for money to buy a game for a while, but they hadn’t budged. So you decided to sell the treat to get that cash quickly and sneakily. When you got home, you didn’t tell your parents because you were supposed to be eating the lunch they sent you, not illicitly trading it for money with your classmates. That’s kind of how the black market works, except instead of trading food in the cafeteria, you’re trading good and services for money in an illegal transaction hidden from the government.

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What is the black market?

The black market is any type of underground economy where goods and services are sold – either virtually or physically – outside the scope of government regulation for trade. These markets avoid regulations such as price controls, taxation, and laws regarding the sale of contraband. Many types of black markets exist, including ones for transportation providers and fuel, but they all have one thing in common: They are illegal, either due to the nature of the good or service or the way in which it is being sold.

The black market goes by many nicknames, including System D, the shadow economy, and the underground economy.

Why do black markets exist?

Black markets exist for several reasons and are present in both developed and developing markets. In general, black markets tend to comprise a smaller percentage of a nation’s entire economy in countries that have lower taxes, fewer regulations, and better established law enforcement.

Zimbabwe and Haiti have among the highest percentage of black market activity as compared to gross domestic product (GDP), while the United States and Switzerland have among the lowest. Let’s look at some key reasons these markets arise.

First, operating in the traditional regulated economy can be expensive. Business owners spend a lot of money on government-mandated income and corporate taxes. It might be tempting for some companies to avoid these costs by taking their businesses underground (aka unreported and out of the government’s view).

Black markets also arise when regulations make it difficult or expensive for businesses to get started in the traditional economy. For some people, the cost of necessary licensure alone might be cost prohibitive – Instead, they can get started for free in the black market. For example, someone who wants to be a contractor but can’t afford the necessary exam and license might do unreported work on people’s houses.

Finally, it’s sometimes the case that people want to buy or sell something that they can’t legally buy or sell in their nation, such as illegal substances, firearms, or even exotic animals. The underground economy is a means to engage in trade for these goods and services.

What can you buy on the black market?

You can buy just about anything in the black market. The black market isn’t just one singular market – Rather, it’s a term that refers to any type of market that is illegal in nature. You can break black market goods down into three primary categories: personal information, illegal products, and legal products sold in an illegal way.

First, the black market includes the virtual sale of personal information, which has become increasingly valuable in the digital age. Hackers devote a massive amount of time and energy to gathering the credit card numbers, bank account numbers, and Social Security numbers of individuals. These hackers often either use the stolen information themselves or sell the stolen information to someone on the black market.

Most people have probably heard about some of the major data breaches that have resulted from the hacking of a large company’s system. These hackers steal personal information of customers and often sell it on the black market. One of the most memorable examples of such a breach was that of Equifax in 2017 – Personal information of about 147 million people was stolen.

Next, people buy and sell a myriad of other illegal products and services on the black market. Some of these items are illegal substances, weapons, gambling, prostitution, forced labor, and even biological organs.

Finally, the black market includes transactions that are illegal because of their nature, not because of the product or service for sale. For example, someone might sell a legal product on the black market so that they don’t have to report that income to the government and pay taxes. Suppose a restaurant operated on a cash-only basis and failed to report its business activity to the Internal Revenue Service (IRS). The eatery is breaking the law both by not collecting and remitting sales tax, and by not reporting earnings for income taxes. Technically, that business is operating in a black market fashion, though the customers might be unaware.

How do black markets work?

Black markets have been around for centuries. As long as there’s products and services to sell and consumers to buy them, these underground markets will exist. Examples of black markets in the US date back to at least the Prohibition era when people sold alcohol illegally underground since there was then a nationwide constitutional ban on it.

Since the invention of the Internet, accessing the black market has become a lot easier. While physical black markets certainly still exist (have you ever bartered with an illegal taxi driver at an airport?), you no longer have to visit a physical location to purchase illegal goods or services – Instead, you can complete the transaction from the comfort of your couch. Technology has also created an entirely new collection of black market products, such as bootlegged software and personal data.

The black market today exists primarily on the dark web. The dark web includes all websites that aren’t indexed by search engines (aka not visible to them) and involves illegal activities. The dark web is not to be confused with the deep web, which is simply any site that isn’t indexed by search engines. A website can be a part of the deep web without being illegal.

The dark web is dangerous to consumers for a couple of reasons. First, the dark web is where black market transactions take place. Participating in these transactions is illegal and can result in criminal prosecution. The dark web is also dangerous because you’re more likely to become a victim of hackers and have your data stolen.

In some cases, black market products might be cheaper than the legal alternative. For example, someone might purchase a legal medication on the black market because they can’t afford to purchase it through legal means and need a better deal. The black market merchant might be able to sell the medicine at a lower cost because they’re avoiding the costs other companies incur as a result of government regulation. It could also be that the seller stole the product, in which case the entire proceeds of the sale are a pure profit for them.

However, not all purchases are cost effective on the black market. Many items are expensive because they can't be legally obtained. Someone who can’t legally purchase a handgun might pay two to three times as much for one on the black market.

Because of the illegal nature of black market transactions, people might be hesitant to use their debit or credit card, which would record the purchase and create a trail. Instead, buyers might be more likely to rely on cash. The black market also relies heavily on cryptocurrencies for payment. A 2018 estimate by academic researchers showed that about $76B of black market activity involved bitcoin, a type of cryptocurrency.

Black market transactions are also often part of money laundering – In these schemes, criminals disguise the money they obtained illegally as having come from a legitimate source.

What is the difference between the black market and the gray market?

The term black market describes the sale of illegal items, as well as the unlawful sale of legal items. The illegal sale of those legal items also falls into another kind of market: The gray market.

The gray market refers to those products that are perfectly legal in most situations, but are sold through illegal channels. It might be that an individual is selling a product they don’t have a license to sell, or that they’re selling items without collecting and remitting sales taxes to the government.

The gray market also includes counterfeit goods. Creating a product that looks like another product in and of itself might not be illegal. But, in the case of counterfeit goods, the seller is usually trying to trick customers into thinking they’re selling the more expensive item that their product resembles – This intentional deceit can be illegal. This type of sale is also considered to be a part of the gray market.

Even the most innocent goods and services can exist in the gray market. For example, many people hire a babysitter to watch their kids on date night. Usually, they pay the babysitter under the table, meaning that the babysitter isn’t reporting that income to the US Internal Revenue Service (IRS).

How does the black market affect the economy?

The underground economy has several implications for the traditional economy. First, black market transactions result in a reduction of tax revenue for the government. That tax revenue is money that the government uses to build infrastructure and provide vital government services like education. When they can’t collect taxes from illegal transactions, they have to collect more money from the rest of us. The US Internal Revenue Service (IRS) estimated a tax gap (aka tax money they should be getting but aren’t), on average, of $441B per year from 2011 to 2013.

The underground economy can also create misleading statistics that measure the traditional economy. Suppose that, in a nation with excessive government regulation, more and more people turned to the black market to run their businesses. If 25 percent of people went to work in the black market, then the traditional economy’s unemployment rate might appear to be at least 25 percent, even though that’s not actually the case.

The black market also depresses a nation’s reported gross domestic product (GDP) – the total value of all goods and services sold. As the value of the nation’s black market goes up, the GDP of the country probably goes down since not all economic transactions are being officially recorded.

The black market and legitimate economy also frequently interact with and influence one another. Suppose that the federal government sees a reduction in tax revenue because of the growing black market. As a result, they increase the corporate tax rate. In response to these increased tax rates, more entrepreneurs take their businesses underground to avoid paying those taxes.

Similarly, suppose that the government has to reduce access to social assistance programs in response to shrinking tax revenue. The people who once relied on those social programs now have to look elsewhere for help and might end up working or shopping in the black market. This cycle perpetuates the very problem that led the government to cut social assistance programs in the first place.

In some ways, the rise of the black market can also have a positive effect on the legitimate economy. When an individual earns money on the black market, they likely turn around and spend most of it in the legal market, which means they’re stimulating the economy and providing tax revenue to the government. Without that illegal income, they wouldn’t have had money to spend at their local grocery store or gas station.

What are the arguments for and against black markets?

Black markets can be harmful to the economy.

First, it can put legitimate companies out of business when they aren’t able to compete with black market vendors. Consider the example of one company that pays its employees legally, while another business pays its employees under the table in cash. The first employer has more costs associated with having employees. They have to pay taxes under the Federal Insurance Contributions Act (FICA), which are Social Security and Medicare taxes, and unemployment taxes. They also have the added administrative burden of running payroll. The business that pays its employees in cash avoids those financial and time costs. The business operating illegally can afford to sell its goods and services at a much lower price than the legal business.

The black market also results in a loss of tax revenue for the government. The government collects various taxes from business owners. These taxes include income taxes, corporate taxes, and sales taxes. The government uses that money to provide critical infrastructure like roads and services like education to its citizens.

Next, the black market can result in poor treatment of employees. Many labor laws help to protect employees from physical and financial harm. Labor laws include minimum wage and workplace safety regulations. When an employee works in the black market, which might be the only job they’re able to find at the time, they don’t get these protections.

Despite the problems with the black market and the negative consequences it can have, there are some benefits. First, there might be individuals whose only source of income comes from the black market. For someone with a family to feed, a job is a job.

The black market can also help consumers to get their hands on products they might not otherwise be able to. In the US, health care is expensive and many individuals don’t have health insurance. If someone needs life-saving medicine and can’t afford to get it legally, the black market might be their best option.

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The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

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