What is the 'Black Market'

Economic activity that takes place outside government-sanctioned channels. Black market transactions usually occur “under the table” to let participants avoid government price controls or taxes. The black market is also the venue where highly controlled substances or products such as drugs and firearms are illegally traded. Black markets can take a toll on an economy, since they are shadow markets where economic activity is not recorded and taxes are not paid. In the financial context, the biggest black market exists for currencies in nations with strict currency controls. While most consumers may shun the black market because they consider it sleazy, there may be rare occasions when they have no choice but to turn to this necessary evil.

BREAKING DOWN 'Black Market'

The black market's many drawbacks include the risk of fraud, the possibility of violence, being saddled with counterfeit goods or adulterated products (which is especially dangerous in the case of medications), and the fact that the buyer has no recourse.

As for currency black markets, they exist primarily in nations that – apart from currency controls – have weak economic fundamentals (such as a high inflation rate and low currency reserves) and a fixed exchange rate where the domestic currency is pegged at an unrealistically high level to the US dollar or other currency. As a result, the currency black market is flourishing in nations like Argentina, Iran, and Venezuela.

Participating in the black market is not always a black and white matter. Suppose you are on vacation with your family in an exotic location and run out of formula for your baby? If there is nothing available in local stores and the only way to acquire baby formula is through a black market transaction, few people would hesitate to make the purchase.

What about paying three times the face value of a ticket to a scalper to see your favorite band or football team? This is also a black market transaction that most people may find justifiable. Further, in a number of developing nations, life-saving medicines are in short supply and often, the only alternative is to procure them through the black market. While critics may carp that this only serves to perpetuate the illegal and unethical practice of profiteering from someone else’s misfortune, participating in the black market is a relatively easy decision to make when someone’s life is at stake.

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