Black market

The black market is the sector of economic activity in a jurisdiction involving illegal activities. Depending on the sense in which the term is used, this can primarily refer to illegally avoiding tax payments, to the profits of narcotic trafficking, or profits made from theft. It is so called because "black economy" or "black market" affairs are conducted outside the law, and so are necessarily conducted in the dark -- if not literally, then metaphorically, out of sight of the law.

Black markets exist when the state places restrictions on the production or provision of goods and services that come into conflict with market demands. These markets prosper, then, when state restrictions are heavy, such as during prohibition or rationing. However, black markets are normally present in any given economy; where there are laws, someone will break them.

Black market price

As a direct result of an increase in government restrictions, black market prices for the relevant products will rise, as said restrictions represent a decrease in supply. According to the theory of supply and demand, a decrease in supply -- making the product more scarce -- will increase prices, other things being equal. Similarly, increased enforcement of restrictions will increase prices for the same reason.

Goods acquired illegally can take one of two price levels; they may be less expensive than (legal) market prices, because the supplier did not incur the normal costs of production. Alternatively, illegally supplied products may be more expensive than normal prices, because the product in question is difficult to acquire, and may not be available legally.

In the former case, however, most people are likely to continue to purchase the products in question from legal suppliers, for a number of reasons:

• The consumer may feel that the black market supplier conducts business immorally (although this criticism can extend to legal suppliers too);
• The consumer may -- justifiably -- trust legal suppliers more, as they are both easier to contact in case of faults in the product and easier to hold accountable;
• In some countries, it is a criminal offence to handle stolen goods, a factor which will discourage buyers.

Black market prices can be reduced by removing the relevant legal restrictions, and so increasing supply. Alternatively, the government could attempt to decrease demand. However, this is economically out of fashion and not as simple a process as decreasing supply.

Examples of black markets

The Prohibition period in the United States is a classic example of black market activity, when organised crime groups took advantage of the lucrative opportunities in the resulting black market in banned alcohol production and sales.

In many countries today, a "war on drugs" has created a similar effect for goods such as marijuana.

Similarly since prostitution is illegal in many places, a black market develops.

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See also: business ethics, grey market

Compare: informal economy