Black Market
It is an area of the economy where illegal transactions takes place.
A black market is an area of the economy where illegal transactions, i.e., where transactions take place without the knowledge of any governing body, government, or tax authority, mostly involving the violation of certain laws such as filing of proper tax returns.
This market is also known by other terms. Such as:
Underground Market.
Hidden Economy.
Unreported Markets.
Shadow Market.
It is a transaction platform, either physical or virtual, where the services or goods are not exchanged legally. The component that makes a market 'black' can be either the illegal nature of goods and services, illegal transactions, or both.
It is distinct from a grey market, defined as the legal trade of goods through various channels, either unauthorized, unofficial, or legal yet unintentional by the original manufacturer.
The transactions of this market usually happen "under the table" so that the participants can avoid government controls or taxes. The goods or services sold at this market are either lawfully banned, or they can be legal, but the transaction takes place to avoid taxes.
Max Planck Institute for the Social Sciences (MPIfG) started studying this particular market in 2012. A team of scholars and academicians was led by Director Jens Beckert to figure out the borderlines separating the illegal market.
The Silk Road Market is the most recent example of an illegal market using modern-day technology. It was a digital market that used bitcoin for money laundering, transactions of illegal drugs, and illegal weapon sales.
This market started its operation in 2011 and was ended in 2013 by the Federal Bureau of Investigation (FBI). The mastermind behind this market was a 29-year-old computer engineer named Ross Ulbricht.
Silk Road was born in 2011 because of the need to connect illegal drug sellers with potential buyers online while not revealing their true identities and transactions using anonymization techniques.
It created heaven for drug traders through a combination of data anonymization technology and a feedback trading system. This site was only accessible through a network called Tor.
Due to this, buyers and sellers brazenly conducted illegal activities without fearing their IP addresses being traced back to them.
It specialized in selling various illegal goods and made $1 billion by sales.
It began to be known as the Amazon of the dark web. Here, an individual would be able to purchase anything such as heroin, false documents, and even murderers for hire.
Background and Understanding
There is no common term in the literature on the black market, and it has instead come up with various synonyms such as shadow, hidden, grey, clandestine, illegal, unreported, informal, second, parallel, subterranean, and unrecorded.
There are multiple illegal markets all over the world. Such hidden economies are omnipresent, meaning these exist both in well-planned market-oriented and centrally planned nations, either developed or developing.
According to institutional rules that are violated, the underground activities are distinguished into different types, which are listed below:
1. Illegal Economy: It consists of economic activities that violate legal laws defining the legitimate source of economy. The participants of the illicit economy produce and distribute legally banned goods and services.
2. Unreported Economy: It is defined as fiscal rules which are institutionally established as mentioned in the tax code. A small example of an unreported economy is the amount of the economy not reported to the tax authority. A measure of such an economy is the tax gap.
3. Informal Economy: The cost of such an economy is excluded from the benefits and rights which are included in the laws and rules which cover torts, financial credit, labor contracts, and the social security systems.
It is the part of the economy that is not taxed, included in the gross national product (GNP), or monitored by the government. It is hidden from the state for various taxes but is legal in every other aspect.
4. Unrecorded Economy: It is the unrecorded income that should be recorded in the national accounting system but is not done.
It is very popular in transition countries that switched to the UN standard national accounting system from the socialist accounting system.
Since the history of the black markets, every transaction has been conducted in cash. It was one of its defining aspects and done to avoid any paper trail.
After the rise of technology and the internet, most underground market transactions are now conducted online, such as on the dark web, with the help of digital currencies.
These markets can take a toll on the economy as they are considered shadow markets whose economy is not recorded and taxes are not paid.
Also, these asset classes are out of government control, which means it cannot control the supply of these assets in the economy. This is what makes it dangerous and harmful to economic stability.
The common assumption is that a country's actual Gross Domestic Product (GDP) is not the actual one as the businesses conducted in these markets are not considered.
Why do Black Markets Exist?
It is also termed a shadow market and came into existence because people wanted to exchange or buy goods and services prohibited by the government. It skews the economic data as the transactions are unrecorded.
The primary reason for the existence of such markets is irregularities in the demand and supply equation. If a particular commodity has a very high demand but a very limited supply, then people would agree to pay more price than what is accepted in the market.
For example, this is highly frequent when the commodity is a niche product with a high utility, like a drug that can cure a rare disease that is fatal for the person having the disease.
These illegal markets also arise when people do not want to pay taxes on purchasing legal or illegal goods and services.
For example, neither buying nor selling food is illegal, but if the good is sold illegally, the transaction enters the illegal market.
While it's perfectly legal to sell food, when an all-cash restaurant does not remit to the state government the mandatory sales tax, it too has entered the illegal market.
They also exist because the people don't follow government laws, such as not reporting the taxable price of transactions and not paying employment tax after hiring a regular housekeeper or babysitter.
There are various conditions due to which such a market exists, and they are listed below:
1. Licensure-Driven Black Market Conditions: The different licensing restrictions imposed by the government on various occupations is the reason why some workers have no choice but to venture into the illegal market.
It is because they can not afford or have the will to invest the time and economy to obtain the necessary licenses.
For example, in New York City, the purchase of a license called a medallion is a must to legally operate a taxi business. These medallions are too expensive for most entrepreneurs.
Therefore, many people choose to operate illegally without a license until they are caught.
2. Trade-Driven Black Market Conditions: Every participant in these markets does not want to act illegally, but as they need money, their inability to work legally prohibits them from not reporting their jobs or income to the government.
This situation arises when illegal immigrants obtain jobs, when students traveling abroad avail themselves of employment without a proper work visa or when children of minimum age requirements work for money and survival, also known as child labor.
The government of many countries has been trying to keep a check on this situation. Still, due to the increasing number of immigrants, it is nearly impossible to eradicate the possibility of this illegal market condition.
3. Regulations-Driven Black Market Conditions: These markets can also appear due to the shortages created by government-imposed price ceilings.
For example, if the government caps prices at a grocery store, where bottled water is to be sold after a natural disaster, then the store will quickly run out of water. The vendors will then likely sell water at a higher price than the people are willing to pay.
Overregulation by governments can also cause such underground markets. These markets are rampant because citizens want to buy goods and services that are hard to get through legal channels.
4. Economy-Driven Black Market Conditions: Underground Markets can also rise due to high unemployment. When workers are unable to find any job in the legal economy, then they turn to the illegal market.
Such jobs can be as simple as babysitting (but being paid in cash and not reporting it to the legal tax authorities) or something as serious as selling cocaine or other drugs (where both the sale and not reporting the income to tax authorities is illegal).
Earning money but not reporting it legally to the tax authorities is the main cause of economy-driven illegal market conditions.
Different Types of Illegal Markets
An underground market is a place where the exchange of illegal goods and services is conducted. Highly controlled substances or products such as drugs and firearms are illegally traded at such venues.
Human Trafficking is a vast illegal market. It moves people into prostitution, forced labor, and the market for human organs.
Prostitution is highly illegal and regulated in many countries. An underground market for prostitution is developed due to the consistently high demand from customers, high pay, but labor-intensive and work with low skill, attracting a constant supply of workers.
It is estimated that in 2021, there will be 40 million people trapped in modern enslavement worldwide. Almost three-quarters (71%) are women and girls.
According to a 2014 International Labor Organization (ILO) report, profits of $150 billion a year are earned from human trafficking.
An underground market exists to supply illegal drugs. The demand remains high despite numerous law enforcement efforts, providing huge profit for organized criminal groups.
Many countries began to ban the use or possession of recreational drugs. Illegal markets exist despite law enforcement efforts.
The retail market value of illegal drugs is $446 billion, according to the United Nations.
Drug legalization activists drew a parallel between the illegal drug trade and the Prohibition of alcohol in the United States in the 1920s.
The illegal market meets the demands for firearms and ammunition that are either illegal or may only be obtained legally after obtaining different permits and paying fees.
Smuggling firearms do this from different countries where it is stolen or bought legally or by stealing them from the arms manufacturers themselves.
People can also satisfy requests by gunsmithing their firearms in scenarios where the underground economy cannot smuggle firearms.
Illegal human organ trafficking occurs when organs are removed from the body, either deceased or alive, for the purpose of commercial transactions, according to the World Health Organization (WHO).
Despite prohibitions from the government, in 2005, it was estimated that 5% of all organ recipients were engaged in commercial organ transplants.
The nations with strict currency controls are the biggest underground markets for currency.
Currency illegal markets exist in nations that - apart from currency controls - have weaker economic fundamentals (high inflation rate and low currency reserves) and a fixed exchange rate.
Recently, cryptocurrencies such as bitcoin have been a medium of exchange in underground markets. The underground currency market is flourishing in Argentina, Venezuela, and Iran.
Case For And Against
Some people favor the concept of black markets. Such markets can supply goods and services that, while being illegal (like marijuana), also improve the quality of life (used to alleviate pain for patients who have not found relief from legal drugs).
These markets are useful in providing legal necessities that are in short supply, as in the case of Cuba or a city that is hit by a hurricane.
Also, the underground economy allows people to earn a living who would either seek welfare illegally - people who would be employable under fewer government regulations or in an economy having a higher employment rate.
The case for the black market is debatable and highly subjective depending on one's moral and ethical beliefs.
There are many downsides of underground markets, some of which are subjective, but many would agree these are serious problems.
Some goods in underground markets are stolen from legitimate legal markets, taking their business away from law-abiding businessmen and entrepreneurs.
Most consumers would not mind buying stolen goods at a lower rate than the actual price, while others would be appalled at knowing that by buying such products, they were actively supporting the underground markets.
The dark side of such underground markets goes beyond theft and resale of stolen goods and services. Illegal market activities are sometimes used in funding terrorist organizations since the profits can not be adequately traced.
Violence is another problem in such illegal markets. The participants can not rely on legitimate police protection in case of theft or even other serious crimes because these markets are unregulated and illegal.
If a drug dealer's stash of heroin is stolen by another rival gang, he can not approach the police for help in getting his merchandise back. This is how the start of violence takes place in underground markets.
Symbiotic Relationship Between Legal Markets and Black Markets
Source: Mere Liberty- The Problem With Black Market Economics
Legal bans sometimes lead to the birth of these illegal markets, which is nearly impossible to eliminate.
A Standford University research study named "Forbidden Transactions and Black Markets" by Chenin Gu, Alvin E Roth, and Quingyun Wu states that the white markets places attract their valued customers by making the place safe and trustworthy.
The idea of penalization acts as discouragement towards unlawful activities in underground markets. However, most of the time, such penalties are useless, create no social stigma, and have no effect on the participation of the black market.
Day by day, illegal trading gathers volume, organically allowing more participants to continue the trade and avoid legal penalization. As a result, such illegal markets become more difficult to completely wipe out when operated for a long period.
Almost a fifth of the global economic activity is represented by the underground market itself, as stated by a National Bureau of Economic Research study.
Authors like Solomon Hsiang and Nitin Sarkar, in "Does Legalization Reduce Black Market Activity? Evidence from a Global Ivory Experiment and Elephant Poaching Data," evaluates the first-ever global legalization experiment conducted in an internationally banned black market.
The findings were quite surprising. The study charted a 66% increase in the trade of illegal ivory that aligned with the announcement of legalizing ivory sales.
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