When we think of the black market, we often imagine a dark alley filled with rusty garbage cans, rain puddles and a shadowy figure lurking in the corner. While this may be the setting for many illegal activities, black markets are alive and kicking in all corners of the world, sometimes in plain view. And they are big business, accounting for a significant portion of the world's economic activity.
In Pictures: Biggest Stock Scams
What Is the Black Market?
The term "black market" refers to economic activity that occurs outside the boundaries of government policy. In other words, it is a market where certain goods or services are regularly traded contrary to government regulations. The term black market stems from the fact that the activity is conducted "in the dark", hidden from any type of law enforcement. There are several reasons why black markets form:
- To avoid government price controls or rationing of goods
- To avoid paying taxes on the goods or service
- To obtain goods or services that the government does not want people to have
Avoidance of government price controls and rationing is widespread, particularly during times of war or natural disaster. Goods may be in short supply and consumer use is restricted to ensure that the government has adequate resources for the war or rebuilding effort.
Taxes on goods such as firearms and cigarettes are steep, and therefore a black market exists for these goods so that they can be bought and sold without taxation. Goods that are stolen and resold also avoid taxation. ("Sin" businesses often thrive, even in the worst economic conditions. For more insight, see Industries That Thrive On Recession.)
Many goods and services that people want, but that the government restricts, flourish on the black market. Included in this group are illegal drugs and prostitution. Certain countries have such a prosperous illicit sex trade that they have become tourism destinations for those seeking this commodity.
The Business of Black Markets
The prevalence of black markets varies throughout the world and from one time period to another.
In general, as a government tries to impose more control of its economy, black market activity will support a larger fraction of the country's economic activity. The very basic principles of supply and demand play a key role in black markets. They will continue to thrive as long as sellers (supply) can be matched with buyers (demand).
Black markets account for a substantial portion of gross national product (GNP) in various countries worldwide. In developing countries, it is estimated that black market activity accounts for over half of GNP. Black market activity within the United States is believed to amount to at least 10% of GNP.
The Price of Goods
The price of black market goods and services can fall above or below legal market prices. Prices are higher where the goods or service are difficult to acquire or produce, dangerous to handle or transport, or otherwise challenging to obtain in a legal manner. Prices are lower where the supplier does not have to pay for manufacturing costs or taxes.
Examples include illegally obtained goods that are turned around and sold for less than the fair market price, such as stolen art or pirated software.
Black Markets Come and Go
Goods and services come and go on the black market as governmental policies change. For example, in the United States from 1920 until 1933 it was illegal to purchase, manufacture, transport or sell alcohol for consumption. This prohibition of alcohol led to an underground world of bootlegging and speakeasies, granting anyone with the moxie access to all types of home-grown alcohol, such as moonshine or bathtub gin. A profitable and violent black market flourished. The problem spread as law enforcement agencies saw greener grass on the dark side of the law, leading to widespread racketeering. When prohibition was repealed in 1933, the black market for alcohol failed because of competition from low-priced alcohol sales at legal liquor stores.
Today's Black Markets
Today's black markets are varied and widespread. The illegal drug trade, along with small arms and light weapons (SA/LW) trafficking, for example, comprise a considerable proportion of black market activity.
Each is a multibillion dollar industry. Drugs can be purchased on the street for as little as a few dollars, while a shoulder-fired surface-to-air missile (SAM) can go for a between $5,000 and $30,000 on the black market.
Other black markets include
- Copyrighted material (pirated music, movies, video games and computer software)
- Currency (either to improve exchange rates or launder illegally obtained or counterfeit currency)
- Exotic animals and products (for pet owners, food or medicinal purposes)
- Human organs for transplants and research
All told, black markets generate revenue in the trillions of dollars yearly, and measures to combat these illegal markets cost billions. And you don't have to be in a dark alley to become a black market participant. Throughout the world, these goods and services are available on street corners, in parks and even in regular shops. It is big business, and while the goods and services may change from time to time, there will still be black markets as long as sellers and buyers can be matched.