What Is a Black Market?

A black market is an 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 goods and services offered in a black market can be illegal, meaning their purchase and sale are prohibited by law, or they can be legal but transacted to avoid taxes.

Black markets are also known as shadow markets or underground markets.

Key Takeaways

  • A black market is an economic activity that occurs outside of government-sanctioned channels.
  • Black markets trade in illegal goods and services, legal goods and services to avoid taxes, or both.
  • Examples of black markets include the sale of illegal drugs, weapons, human trafficking, and the illegal wildlife trade.
  • Black markets can have a negative impact on the economy because the activity is not reported and taxes are not collected on the transactions.
  • Black markets do provide some benefits, such as creating jobs for those who may not be able to find employment in traditional markets and allowing access to medicine and healthcare to those individuals that might not have had access otherwise.

Understanding a Black Market

Traditionally, black market activity was conducted in cash, one of its defining aspects. This was done in order to avoid creating any paper trail. With the rise of the Internet, many black market transactions are now done online, such as on the dark web, and often conducted with digital currencies.

Because of this nature, 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. It is often assumed that a country's gross domestic product (GDP) is not its actual GDP because it does not take into account all the business activity conducted in black markets.

The black market's many drawbacks include the risk of fraud, the possibility of violence, and being saddled with counterfeit goods or adulterated products, which is especially dangerous in the case of medications.

Types of Black Markets

A black market is often a place for the exchange of illicit and dangerous goods. They are venues where highly controlled substances or products such as drugs and firearms are illegally traded.

Human trafficking is a very large black market. Human trafficking moves people into forced labor, prostitution, child armies, and the market for human organs.

In 2021, it is estimated that there are 40 million people trapped in modern slavery worldwide. One-in-four of them are children. Almost three-quarters (71%) are women and girls. From a 2014 International Labor Organization (ILO) report, human trafficking earns profits of $150 billion a year.

Other black markets include illegal gambling, the illegal wildlife trade, and illegal mining, fishing, and logging.

In the financial context, the biggest black market exists for currencies in nations with strict currency controls. While most people may shun a black market because they consider it sleazy, there may be rare occasions when they have no choice but to turn to this necessary evil.

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 U.S. dollar or other currency. As a result, the currency black market is flourishing in nations like Argentina, Iran, and Venezuela.

The Necessity of Black Markets

Sometimes, a black market is the only choice for procuring goods in certain situations for certain people. For example, 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.

Paying a premium over the face value of a ticket to see a concert or sporting event is also an example of a black market transaction. 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.

Black market transactions provide no recourse to the buyer in case the product is defective and a buyer in a black market can suffer penalties and jail times just as easily as a seller can.

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.

Example of a Black market

One of the most recent examples of a black market using modern technology was that of the Silk Road black market. This was a digital market that used Bitcoin for money laundering and illegal drug transactions and weapons sales.

The market began in 2011 and closed in 2013 when it was stopped by the FBI. The man behind the market was a 29-year old computer science engineer named Ross Ulbricht. Silk Road sold a variety of illegal goods and made $1 billion in sales.

It connected 4,000 drug dealers to 100,000 buyers. An individual could purchase almost anything; heroin, rocket launchers, falsified documents, and even murders for hire were discussed. It was known as the Amazon of the dark web.

It led to a global search for Ulbricht. He was finally captured, the black market shut down, and he is now serving life in prison.

Black Market FAQs

What Is a Simple Definition of the Black Market?

A black market is any market where the exchange of goods and services takes place in order to facilitate the transaction of illegal goods or to avoid government oversight and taxes, or both.

How Does the Black Market Work?

There are a variety of black markets and all of them work in different ways. A black market can be a physical market where two individuals meet to exchange illegal goods, for example, a drug transaction on a street corner. A black market can also exist online, such as on the dark web, where individuals communicate to exchange goods and payments are made in digital currencies.

What Is an Example of a Black Market?

An example of a black market would be the human trafficking market that engages in the capture of people throughout the world and their sale into various areas, such as forced labor and prostitution.

Is the Black Market Illegal?

All black markets are illegal.

Why Is It Called the Black Market?

There are various theories as to why it is called the "black" market. These include the association of the word black with shadows and darkness, with the markets that continued to sell slaves after abolition, and the association of the color black with anarchist groups.