Black market

The black market or underground market is economic activity involving illegal dealings, typically the buying and selling of merchandise or services illegally. The goods themselves may be illegal to sell (e.g. weapons or illegal drugs); the merchandise may be stolen; or the merchandise may be otherwise legal goods sold illicitly to avoid tax payments or licensing requirements, such as cigarettes or unregistered firearms. 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 state 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 and/or rationing. However, black markets are currently present in any known economy.

Black market price

As a result of an increase in government restrictions, black market prices for the relevant products will 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.

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. 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 hardly 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:

• Some consumers may feel that the black market supplier conducts business immorally (although this criticism sometimes extends 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 offense to handle stolen goods, a factor which will discourage buyers.

In the latter case of a black market for goods which are simply unavailable through legal channels, black markets will 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 will prosper, and the black marketeers often reinvest profits in a widely diversified array of legal or illegal activity well beyond the original item.

Black markets can be reduced or eliminated by removing the relevant legal restrictions, thus increasing supply and quality. People who advocate this may believe that governments should recognize fewer crimes in order to focus law enforcement effort on the most treatable dangers to society. However, this can be seen by some people as the equivalent of legalizing legal crime in order to reduce the number of "official" criminal delicts — in other words, a concession that in their view only makes matters worse because of a perceived disappearing of their moral values. Alternatively, the government could attempt to decrease demand. However, this is economically out of fashion and not as simple a process as decreasing supply.

The Term "Black Market" also applies to illegal monetary exchange outside the authorized institutes (Banks or Legal Exchange Offices)

Examples of black markets

Wars

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 which are needed for the war effort, such as food, gasoline, rubber, metal, etc., typically through rationing. In most (or perhaps all) cases, a black market develops to supply rationed goods at exorbitant prices. The rationing and price controls enforced in many countries during World War II encouraged widespread black market activity.

Illegal drugs

Beginning in the 19th and 20th centuries, many countries began to ban the possession or use of various recreational drugs, such as the United States' famous "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 dollars. 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 will simply rise in response to the decrease in supply—encouraging new distributors to enter the market in a perpetual cycle. Many drug legalization activists draw parallels between the United States' experience with alcohol Prohibition and the current bans on cannabis.

Prostitution

Similarly, as prostitution is illegal in many places, and yet market demand for the services of prostitutes remains high, a black market inevitably results.

Alcohol and tobacco

Black markets can also form near when 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 leads to a profit of $2 Million Dollars.

Copyrighted media

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 cracks for most extant forms of copy protection technology allow anyone with a few hundred dollars to produce DVD and CD copies that are digitally identical to an original and suffer 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 outside of First World countries further compounds the issue there.

Prohibition in the United States

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 good has to be acquired on the black market, and its end. Many organized crime groups took advantage of the lucrative opportunities in the resulting 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 shouldn't be treated like conventional criminals), illegal speakeasies prospered, and organizations such as the Mafia grew tremendously more powerful through their black market activities distributing alcohol.

Burma under Ne Win

Another classic 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.

The Soviet Union

Due to frequent shortages of consumer goods and limited access to imported goods, black markets thrived in Communist Eastern Europe and the Soviet Union. See also blat.

External links

• Discussion of trading on the communist black market by a former smuggler: http://www.raelynnhillhouse.com/secrets/bmarket.php
• War on Junk: Black Market Satire
• The Effects of a Black Market Using Supply and Demand
• Information on Black Market products

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