The black market or underground market is economic activity involving the buying and selling of merchandise or services illegally. The goods themselves may be illegal to sell (such as weapons or illegal drugs); the goods may be stolen; or the goods may be otherwise legal goods sold illicitly to avoid tax payments or licensing requirements (such as cigarettes or unregistered firearms). The term black market also applies to illegal currency exchange outside the authorized institutes (banks or legal exchange offices). It is so called because "black economy" or "black market" affairs are conducted outside the law, and so are necessarily conducted "in the dark," out of the sight of the law. Black markets develop when the government places restrictions on the production or provision of goods and services. These markets prosper, then, when state restrictions are heavy, such as during a period of prohibition, price controls, or rationing. However, black markets for particular goods and services continue to exist under all forms of government. The elimination of black markets cannot be achieved by government action alone, but rather involves an agreement on the part of the people and government as to which goods and services may be traded, as well as an overall change in the responsiveness of people to ethical and legal aspects of trade.
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 or pay the usual taxes. In this case, however, most people are likely to continue to purchase the products in question from legal suppliers, for a number of reasons:
Alternatively, illegally supplied products may be more expensive than normal prices, because the product in question is difficult to acquire or produce, dangerous to deal with, or may not be available legally. In the case of a black market for goods that are simply unavailable through legal channels, black markets thrive if consumer demand nonetheless continues. In the case of the legal prohibition of a product viewed by large segments of the society as harmless, such as alcohol under prohibition in the United States, the black market prospers, and the black marketers often reinvest profits in a widely diversified array of legal or illegal activities well beyond the original item.
As a result of an increase in government restrictions, black market prices for the relevant products rise, as said restrictions represent a decrease in supply and an increase in risk on the part of the suppliers, sellers, and any and all middlemen. 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.
Black markets can be reduced or eliminated by removing the relevant legal restrictions, thus increasing supply and quality. An argument in favor of this approach is that governments should recognize fewer crimes in order to focus law enforcement efforts on the most treatable dangers to society. However, this can also be seen as the equivalent of legalizing crime in order to reduce the number of "official" criminal delicts—in other words, a concession that can be viewed negatively because of a perceived disappearing of moral values. Alternatively, the government could attempt to decrease demand. However, this is not as simple a process as increasing supply.
A wide variety of items has been and continues to be sold on the black market. These range from items that the government has deemed illegal but which large numbers of people consider morally acceptable and harmless (alcohol and tobacco and recreational drugs), items that are cheaper on the black market (copyrighted media) or more readily available (body parts), to those that the majority would agree are morally questionable or unacceptable (endangered species, prostitution and sex slaves).
The Prohibition period in the early twentieth century in the United States is a classic example of the creation of a black market, its activity while the affected commodity has to be acquired on the black market, and its return to legal trade. Many organized crime groups took advantage of the lucrative opportunities in the black market in banned alcohol production and sales. Since much of the populace did not view drinking alcohol as a particularly harmful activity (that is, consumers and its traders should not be treated as conventional criminals), illegal speakeasies prospered, and organizations such as the Mafia grew tremendously powerful through their black market alcohol distribution activities.
Black markets can also form near where neighboring jurisdictions with loose or no border controls have substantially different tax rates on similar products. Products that are commonly smuggled to fuel these black markets include alcohol and tobacco. It has been reported that smuggling one truckload of cigarettes within the United States may lead to a profit of as much as $2 million.
There exists a large demand for organs such as kidneys and hearts for transplant to people suffering from terminal diseases. However, there is a great disparity between the number of patients and the number of human organs available for transplant. Additionally, organ availability is not expected to increase significantly in the future. Obtaining these organs legitimately is difficult because of the scarcity of people who are about to die whose bodies are in good enough condition for their organs to be harvested. Equally, the altruistic organ donation model in the United States, the "Gift of Life" concept, is "far too attenuated to promote broad-scale participant confidence."
Great demand and scarcity of supply has led to a lucrative black market for the sale of organs, which is illegal in most countries. The trade of organs is illegal because countries fear either direct murder for body parts or doctors passively letting patients die in order to use their organs.
Free market economists, however, have argued that an organ market would be the most efficient way of distributing organs to those in need, rather than the current system of first-come, first-serve waiting lists. They have argued that this system would provide more of an incentive for people to donate their organs by giving them a monetary reward. It has also been suggested that a market would allow governments to regulate and supervise the trade, eliminating dangerous operations done in the margins of a black market.
Street vendors in many areas, particularly in countries with loose enforcement of copyright law, often sell deeply discounted copies of movies, music CDs, and computer software such as video games, sometimes long before the official release of a title. Innovations in consumer DVD and CD burners and the widespread availability on the Internet of software "cracking" for most extant forms of copy protection technology allow anyone to produce DVD and CD copies that are digitally identical to an original, suffering no loss in quality.
Such operations have proven very difficult for copyright holders to combat legally, due to their decentralized nature and the cheap widespread availability of the equipment needed to produce illegal copies for sale. Widespread indifference towards the enforcement of copyright law on the part of law enforcement officials in many countries further compounds the issue.
Many people are interested in owning the exotic. Many are also interested in owning the illegal. For this reason, many endangered species are popular items for sale for their beauty, rarity, and the risk of owning one. Though the Endangered Species Act makes trade in endangered species illegal in, to, or from the United States, there is still a large market both in the United States and around the world. The appeal to many lies in the very fact that these animals are endangered, which leads to a vicious cycle of people endangering animals by hunting them, and then hunting them because they are endangered. Countries, such as India, that have allowed or encouraged the hunting of endangered species claim these animals are in overabundance in their countries and that fees from hunting licenses bring in much needed revenues. The internet has facilitated the trade in endangered species, as buyers and sellers from around the world are easily matched up. The online auction site eBay has banned sales of many animals, but has continued to receive criticism for allowing the sale of others.
Beginning in the nineteenth and twentieth centuries, many countries began to ban the possession or use of various recreational drugs, such as the United States' "war on drugs." Many people nonetheless continue to use illegal drugs, and a black market exists to supply them. Despite ongoing law enforcement efforts to intercept illegal drug supplies, demand remains high, providing a large profit motive for organized criminal groups to ensure that drugs are available. The United Nations has reported that the retail market value of illegal drugs is worth $321.6 billion.
While law enforcement efforts do capture a small percentage of the distributors of illegal drugs, the high and very inflexible demand for such drugs ensures that black market prices simply rise in response to the decrease in supply—encouraging new distributors to enter the market in a perpetual cycle. Many drug legalization activists have drawn parallels between the United States' experience with alcohol prohibition and the bans on cannabis.
As prostitution is illegal in many places, and yet market demand for the services of prostitutes remains high, a black market inevitably results. Beyond the act of prostitution, a black market for sex slaves also exists, known as human trafficking.
Governments often place restrictions on markets because of a philosophical commitment to controlled markets, lack of foresight, martial rationing, or moral ideology. Black markets thrive in such repressive regimes.
An example is Burma under the rule of Ne Win. Under his "Burmese Way to Socialism," the country became one of the poorest in the world, and only the black market and rampant smuggling supplied the people's needs.
Black markets flourish in most countries during wartime. Most states engaged in total war or other large-scale, extended wars must necessarily impose restrictions on domestic use of critical resources that are needed for the war effort, such as food, gasoline, rubber, metal, and so forth, typically through rationing. In most (or perhaps all) cases, a black market develops to supply rationed goods at exorbitant prices. Thus, the rationing and price controls enforced in many countries during World War II encouraged widespread black market activity.
As illustrated above, there are many products and motivations for the creation of black markets. These range from engaging in pleasurable, yet taboo activities such as illicit drug use and trade in endangered species, to prolonging of life with the trade of organs. Burgess Laughlin has suggested three necessary conditions for the formation of black markets:
First, someone must have a product or service to sell, and someone must be willing (and able) to buy it. Second, the deals must be illegal. Third, law enforcement people must be unaware of the violations or lack the resources or desire to stop them.
Economists have argued that the vast black markets present in the world highlight the efficiency of markets and expose unused potential for revenue on the part of governments unwilling to indulge these markets. Others argue that trade in items available on the black market should be illegal due to their moral ambiguity or downright offensiveness.
The existence of black markets serves as an example of a larger debate over whether governments should attempt to legislate morality. Libertarians have argued that the only purpose of the government is to guarantee private property. However, governments have traditionally done much more than that as seen in such laws as the U.S. blue laws or the extensive provisions over domestic life seen in the Sharia law practiced in many Islamic countries.
It has been argued that products only available on the black market, such as drugs, are not inherently bad, but are only labeled so by moralistic governments. From this viewpoint, black markets are the inevitable result of excessive government restrictions that do not reflect the will of the people. The remedy, then, is to remove the restrictions.
While a case may be made for developing a legal system for items such as body parts, which would benefit both seller and recipient, the legalization of trade in all commodities cannot be justified in this way. The banning by national governments as well as international bodies such as the United Nations of the sale of human beings into slavery as prostitutes and the sale of endangered species as exotic decoration, is generally considered an advance in the pursuit of a better human society, and the elimination of such black markets by reducing the demand is the desirable course of action.
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