Black market definition

What is a Black Market?

A black market involves the sale of goods and services in an illegal, uncontrolled and unregulated manner. Black markets typically arise when the government attempts to control prices or imposes an excessively high tax burden on transactions. For example, when a government imposes price controls on fuel, individuals willing to pay more than the fixed rate will form the demand side of a black market. Anyone willing to supply them with the fuel at a higher price point forms the supply side of the market. Similarly, when the government imposes a high tax surcharge on cigarettes, it is quite likely that there will be a thriving black market in which cigarettes are traded at a much lower price, but without the tax. Another example of a black market is in currency trading, which arises when a government locks in the exchange rate at which its currency can be converted to other currencies.

Is a Black Market Illegal?

Black market transactions are always illegal, so governments typically have enforcement divisions that seek out black market transactions and penalize those engaged in them. A country can suffer when the black market component of its economy is large, since the government is unable to glean any tax revenue from it; the result can be very low levels of public service. Also, it is impossible to measure the true size of the economy, since so much of it is not being reported.

Disadvantages of a Black Market

There are a number of downsides to black markets, which include the following:

  • No legal rights between parties. The participants in a black market have no legally-enforceable rights against each other, since they are engaging in transactions that are not supposed to exist. Given the lack of rights, sellers have no incentive to sell quality goods, and so are more likely to sell unsafe or substandard items. For the same reason, sellers are more likely to overcharge their customers or engage in a variety of scams - essentially, whatever they can get away with.

  • Supported by organized crime. Since a black market is illegal, it is likely permeated by organized crime, which means that buyers are supporting criminal enterprises that may engage in a variety of other illegal activities.

  • Encourages bribery. Those parties engaged in a black market are more likely to pay off the local police and other government officials in order to continue their activities. This increases the amount of bribery generally, and so reduces the public trust in government institutions.

  • Shrinks tax receipts. The sellers of goods on a black market do not pay taxes. This reduces the amount of funds available to governments, which in turn reduces the amount of services that can be supplied to the local populace.

Terms Similar to Black Market

A black market is also known as the shadow economy or the underground economy.

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