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A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is not compliant with an institutional set of rules. If the rule defines the set of goods and services whose production and distribution is prohibited or restricted by law, non-compliance with the rule constitutes a black-market trade since the transaction itself is illegal. Such transactions include the illegal drug trade[clarification needed], prostitution (where prohibited), illegal currency transactions, and human trafficking.[1] [2][3]
Participants try to hide their illegal behavior from the government or regulatory authority.[4] Cash is the preferred medium of exchange in illegal transactions, since cash transactions are less easily traced.[5] Common motives for operating in black markets are to trade contraband, avoid taxes and regulations, or evade price controls or rationing. Typically, the totality of such activity is referred to with the definite article, e.g., "the black market in bush meat".
The black market is distinct from the grey market, in which commodities are distributed through channels that, while legal, are unofficial, unauthorized, or unintended by the original manufacturer, and the white market, in which trade is legal and official.
Black money is the proceeds of an illegal transaction, on which income and other taxes have not been paid, and which can only be legitimised[clarification needed] by some form of money laundering. Because of the clandestine nature of the black economy, it is not possible to determine its size and scope.[6]
Definition
The literature on the black market has not established a common terminology and has instead offered many synonyms including: subterranean, hidden, grey, shadow, informal, clandestine, illegal, unobserved, unreported, unrecorded, second, parallel, and black.[4]
There is no single underground economy; there are many. These underground economies are omnipresent, existing in market-oriented as well as in centrally planned nations, be they developed or developing. Those engaged in underground activities circumvent, escape, or are excluded from the institutional system of rules, rights, regulations, and enforcement penalties that govern formal agents engaged in production and exchange. Different types of underground activities are distinguished according to the particular institutional rules that they violate:[4][7]
- The illegal economy
- The unreported economy
- The unrecorded economy
- The informal economy
The "illegal economy" consists of economic activities pursued in violation of legal statutes that define the scope of legitimate forms of commerce. Illegal-economy participants produce and distribute prohibited
The "unreported economy" circumvents or evades institutionally established fiscal rules as codified in the tax code. A summary measure of the unreported economy is the amount of income that should be reported to the tax authority but is not so reported. A complementary measure of the unreported economy is the "
The "unrecorded economy" circumvents the institutional rules that define the reporting requirements of government statistical agencies.
The "
The term black market can also be used in reference to a specific part of the economy in which contraband is traded.
Pricing
Goods and services acquired illegally and/or transacted for in an illegal manner may exchange above or below the price of legal market transactions:
- They may be cheaper than legal market prices. The home renovations or cosmetologicalservices), the client may be inclined to request a lower price (usually paid in cash) in exchange for foregoing a receipt, which enables the service provider to avoid reporting the income on his or her tax return.
- They may be more expensive than legal market prices. For example, if the product is difficult to acquire or produce, dangerous to handle, is strictly rationed, or is not easily available legally if at all. If exchange of goods is made illegal by some sort of state sanction, such as with certain drugs or wildlife trafficking,[14] their prices will tend to rise as a result of that sanction.
Consumer issues
No government, no global nonprofit, no multinational enterprise can seriously claim to be able to replace the 1.8 billion jobs created by the economic underground. In truth, the best hope for growth in most emerging economies lies in the shadows.
— Global Bazaar, Scientific American[15]
Even when the underground market offers lower prices, consumers may still buy on the legal market when possible, because:
- They may prefer legal suppliers, as these are strictly regulated and easier to contact. In contrast, black market vendors are unregulated and difficult to hold accountable;
- In some jurisdictions such as the criminal offense if they knowingly participate in the black economy;[16]
- They may have a moral dislike of black marketing;
- In some jurisdictions such as England and Wales, consumers found in possession of stolen goods can have them confiscated if they are traced, even if they did not know they were stolen. Though they themselves do not usually face criminal prosecution, they are still left without the goods they paid for and have little if any recourse to get their money back. This may make some averse to buying goods that they think may be from the underground market, even if in fact they are legitimate (for example, items sold at a car boot sale).
However, in some situations, consumers may conclude that they are better off using black market services, particularly when government regulations hinder what would otherwise be a legitimate competitive service. For example, in Baltimore, many consumers actively prefer illegal taxi cabs, citing that they are more available, convenient, and fairly priced.[17]
Traded goods and services
Some examples of underground economic activities include:
Sexual exploitation and forced labor
Prostitution is illegal or highly regulated in many countries. This demonstrates the underground economy, because of consistent high demand from customers, relatively high pay, but labor-intensive and low-skilled work, which attracts a continual supply of workers. While prostitution exists in every country, studies show that it tends to flourish more in poorer countries, and in areas with large numbers of unattached men, such as around military bases.[18] For instance, an empirical study showed that the supply of prostitutes rose abruptly in Denver and Minneapolis in 2008 when the Democratic and Republican National Conventions took place there.[19]
Prostitutes in the black market generally operate with some degree of secrecy, sometimes negotiating prices and activities through codewords and subtle gestures. In countries such as Germany or the Netherlands, where prostitution is legal but regulated, illegal prostitutes exist whose services are offered more cheaply without regard for the legal requirements or procedures—health checks, standards of accommodation, and so on.[citation needed]
In other countries, such as Nicaragua, where legal prostitution is regulated, hotels may require both parties to identify themselves, to prevent child prostitution.
Personal information
Illegal drugs
From the late 19th and early 20th centuries, many countries began to ban the possession or use of some
Although law enforcement agencies intercept a fraction of drug traffickers and incarcerate thousands of wholesale and retail sellers and users,
Weapons
The laws of many countries forbid or restrict the personal
In England and Wales, certain categories of weapons used for hunting may be owned by qualified residents but must be registered with the local police force and kept within a locked cabinet. Among those who may purchase weapons on the black market are people who are unable to pass the legal requirements for registration—convicted felons or those suffering from mental illness for example.
Illegally logged timber
The illegal logging of
Animals and animal products
In many developing countries, living animals are captured in the wild and sold as pets. Wild animals are also hunted and killed for their meat, hide, and organs, the latter of which and other animal parts are sold for use in traditional medicine.
In several states in the United States, laws requiring the pasteurization of milk have created black markets in raw milk, and sometimes in raw-milk cheese which is legal in a number of EU countries but banned in the U.S. if aged less than 60 days.[26]
Alcohol
Rum-running, or bootlegging, is the illegal business of transporting (smuggling) alcoholic beverages where such transportation is forbidden by law. Smuggling is usually done to circumvent taxation or prohibition laws. The term rum-running is more commonly applied to smuggling over water; bootlegging is applied to smuggling over land. According to the PBS documentary Prohibition, the term "bootlegging" was popularized when thousands of city dwellers would sell liquor from flasks they kept in their boot leg all across major cities and rural areas.[27] The term "rum-running" most likely originated at the start of Prohibition in the United States (1920–1933), when ships from Bimini in the western Bahamas transported cheap Caribbean rum to Florida speakeasies. Rum's cheapness made it a low-profit item for the rum-runners, and they moved on to smuggling Canadian whisky, French champagne, and English gin to major cities like New York City and Boston, where prices ran high. It was said that some ships carried $200,000 (roughly equivalent to U$4.5 million in 2022 [28]) in contraband in a single run.
Tobacco
United Kingdom
The United Kingdom has some of the highest taxes on tobacco products in the world and strict limits on the amount of tobacco that can be imported duty-free from other countries, leading to widespread attempts to smuggle relatively cheap tobacco from low tax countries into the U.K. Such smuggling efforts range from vacationers concealing relatively small quantities of tobacco in their luggage to large-scale enterprises linked to organized crime. British authorities have aggressively tried to detect and confiscate such illegal imports, and to prosecute those caught. Nevertheless, it has been reported that "27% of cigarettes and 68% of roll your own tobacco is purchased on the black market".[29]
United States
Smuggling one truckload of cigarettes from a low-tax U.S. state to a high-tax state can result in a profit of up to $3 million.[30] Because traffic crossing U.S. state borders is not usually stopped or inspected to the same extent as happens at the country's international borders, interdicting this sort of smuggling (especially without causing major disruption to interstate commerce) is difficult. Low-tax states are generally the major tobacco producers, and have come under criticism for their reluctance to increase taxes. North Carolina eventually agreed to raise its taxes from 5 cents to 35 cents per pack of 20 cigarettes, although this remains far below the national average.[31] As of 2010[update], South Carolina has refused to follow suit and raise taxes from seven cents per pack (the lowest in the USA).[32]
Biological organs
According to the
Racketeering
A
Transportation providers
Where taxicabs, buses, and other transportation providers are strictly regulated or monopolized by government, a black market typically flourishes to provide transportation to poorly served or overpriced communities. In the United States, some cities restrict entry to the taxicab market with a medallion system (taxicabs must get a special license and display it on a medallion in the vehicle). In most such jurisdictions it is legal to sell the medallions, but the limited supply and resulting high prices of medallions have led to a market in unlicensed
Housing rental
In places where there is
Counterfeit medicine, essential aircraft and automobile parts
Items such as medicines as well as essential aircraft and automobile parts (e.g. brakes, motor parts, etc.) are counterfeited on a large scale.[citation needed]
Copyrighted media
This section is written like a personal reflection, personal essay, or argumentative essay that states a Wikipedia editor's personal feelings or presents an original argument about a topic. (April 2017) |
Copyright infringement law goes as far as to deem illegal "mixtapes" and other such material copied to tape or disk. Copyright holders typically attest the act of theft to be in the profits forgone to the pirates. However, this makes the unsubstantiated assumption that the pirates would have bought the copyrighted material if it had not been available through file sharing or other means. Copyright holders also say that they did work creating their copyrighted material and they wish to get compensated for their work. No other system than copyright has been found to compensate artists and other creators for their work,[citation needed] and many artists do not have an alternative source of income or another job. Many artists and film producers have accepted the role of piracy in media distribution.[41] The spread of material through file sharing is a source of publicity for artists and builds fan bases that may be inclined to see the performer live[42] (live performances make up the bulk of successful artists' revenues,[43] however not all artists can make live performances, for example photographers typically only have a single source of income: the licensing of their photos).
Currency
Money itself may be subject to a black market. Money may be exchangeable for a differing amount of the same currency if it has been acquired illegally and needs to be laundered before the money can be used.[44] Counterfeit money may be sold for a lesser amount of genuine currency.
The rate of exchange between a local and foreign currency may be subject to a black market, often described as a "
- The government sets ("pegs") the local currency at some arbitrary level to another currency that does not reflect its true market value. Certain purchases of foreign currency may be permitted at the official rate; otherwise a less favourable black market rate applies.
- A government makes it difficult or illegal for its citizens to own much or any foreign currency.
- The government taxes officially exchanging the local currency for another currency, or vice versa.
A government may officially set the rate of exchange of its currency with that of other, "harder" currencies. When it does so, the peg may overvalue the local currency relative to what its market value would be if it were a
In situations of financial instability and inflation, citizens may substitute a foreign currency for the local currency. The
If foreign currency is difficult or illegal for local citizens to acquire, they will pay a premium to acquire it. U.S. currency is viewed as a relatively stable store of value and, since it does not leave a paper trail,[dubious ] it is also a convenient medium of exchange for both illegal transactions and for unreported income both in the U.S and abroad.[8]
More recently cryptocurrencies such as bitcoin have been used as a medium of exchange in black market transactions. Cryptocurrencies are sometimes favored over centralized currency due to their pseudonymous nature and their ability to be traded over the Internet.[50]
Fuel
In the EU, it is not illegal for a person or business to buy fuel in one EU state for their own use in another, but as with other goods the tax will generally be payable by the final customer at the physical place of making the purchase.[citation needed]
Between the
The direction of smuggling can change depending on variation in the taxes and the exchange rate between the Republic's euro (and previously punt) and Northern Ireland's pound sterling; indeed sometimes diesel will be smuggled in one direction and petrol the other.[citation needed]In some countries, diesel fuel for agricultural vehicles or domestic use is taxed at a much lower rate than that for other vehicles. This is known as
In countries including India and Nepal, the price of fuel is set by the government, and it is illegal to sell the fuel at a higher price. During the petrol crisis in Nepal, black marketing in fuel became common, especially during mass petrol shortage. At times, people queued for hours or even overnight to get fuel. Petrol pump operators were alleged to hoard the fuel and sell it to black marketeers. Black marketing in vehicle/cooking fuel became widespread during the 2015 Nepal blockade; even after it was eased and petrol imports resumed, people were not getting the fuel as intended, and resorted to the black market.
Sex toys
In some countries including Saudi Arabia, Thailand, and India sex toys are illegal, and are sold illegally, without compliance with regulations on safety, etc. Platforms used to sell sex toys on the black market include consumer-to-consumer online auction websites and private pages on social media websites.
Organized crime
People engaged in the black market may run their business hidden behind a front business that is not illegal.
Often certain types of illegal products are traded for each other, depending on the geographical location.[56]
Causes
Wars
Black markets flourish during
For example, in the
During the
Laws and regulations
A classic example of new regulation creating a black market is the prohibition of alcohol. When such a law disappears, so does the black market. Sin taxes — taxes levied on harmfully deemed products such as alcohol and tobacco — may increase the black market supply.[59] One argument for legalizing marijuana is the elimination of the black market, and taxes from that economy becoming available for the government. [citation needed]
See also
- Agorism
- Black hat (computer security)
- Black market in wartime France
- Business ethics
- Counter-economics
- Darknet market
- Grey market
- Household electricity approach
- Hunger's Rogues, black market in post WWII Europe
- Illicit trade
- Informal economy
- Jangmadang, black and grey markets in post-famine North Korea
- Koutouki
- The Misfit Economy, a book about those involved with the underground economies and grey markets of the world
- Repugnant market
- Unreported employment
- Wide boy
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- ^ a b c d Feige, Edgar L. (2016). "The Meaning and Measurement of Unobserved Economies: What do we really know about the "Shadow Economy"?". Journal of Tax Administration (30/1).
- ^ a b Feige, Edgar L. & Cebula, Richard (January 2011). "America's Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S." Mpra Paper. Retrieved March 5, 2012.
- ^ Feige, Edgar L. (September 2009). "New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"". Mpra Paper. Retrieved March 5, 2012.
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- Portes, Alejandro; Sassen-Koob, Saskia (1987). "Making it underground: Comparative material on the informal sector in western market economies".
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- ^ https://www.ice.gov/features/wildlife Retrieved 28 December 2023.
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- ^ "Jury orders student to pay $675,000 for illegally downloading music". ABCnews.com. ABC. August 3, 2009. Retrieved May 24, 2018.
- ^ a b Christina Royster-Hemby (April 21, 2004). "Feature: A Baltimore Way of Life". Baltimore City Paper. Archived from the original on February 14, 2012. Retrieved March 5, 2012.
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- ^ https://www.unodc.org/southasia/frontpage/2012/August/drug-trafficking-a-business-affecting-communities-globally.html#:~:text=Drug%20trafficking%20%2D%20the%20global%20illicit,be%20a%20%2432%20billion%20industry. Retrieved 28 December 2023.
- ^ "Illegal logging news". Retrieved September 14, 2014.
- ^ "Illegal logging industry worth almost as much as drug production industry". Archived from the original on July 2, 2013. Retrieved January 30, 2013.
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{{cite book}}
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- ^ Edgar L. Feige, "Dynamics of Currency Substitution, Asset Substitution and De facto Dollarisation and Euroisation in Transition Countries", Comparative Economic Studies, September 2003, Vol. 45 #3 pp. 358–383.
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Further reading
- Aligicia, Paul Dragos (2008). "Black Markets". In OCLC 750831024.
- Breusch, Trevor. "Estimating the Underground Economy using MIMIC Models" (PDF). Ideas.repec. Archived from the original (PDF) on May 1, 2011. Retrieved March 25, 2011.
{{cite journal}}
: Cite journal requires|journal=
(help) - Cebula, R (2014). "Where Has the Currency Gone? And Why? The Underground Economy and Personal Income Tax Evasion in the US, 1970–2008" (PDF). Review of Economic Analysis. 6 (1): 36–52. S2CID 54666330.
- Feige, Edgar L. (1989). The Underground Economies: Tax Evasion and Information Distortion. Cambridge: Cambridge University Press. p. 378. ]
- Feige, Edgar L. (2009). "Defining And Estimating Underground And Informal Economies: The New Institutional Economics Approach". S2CID 7899012.
- Schneider, Friedrich; Enste, Dominik H. (2000). "Shadow Economies: Size, Causes, and Consequences". JSTOR 2565360.
- Frey, B. S., and Schneider, F. (2015). Informal and Underground Economics. In: James D. Wright (ed.), International Encyclopedia of the Social and Behavioral Sciences, 2nd edition, Vol. 12. Oxford: Elsevier, pp. 50–55.
- Feige, Edgar L (2016). "Reflections on the meaning and measurement of Unobserved Economies: What do we really know about the "Shadow Economy"?". Journal of Tax Administration Vol. 2 (1). SSRN 2728060.
- Feige, Edgar L. (2016). "Professor Schneider's Shadow Economy: What do we really Know? A Rejoinder". Journal of Tax Administration. 2 (2).
- Roodhouse, Mark (2013). Black Market Britain: 1939–1955. Oxford: Oxford University Press. ISBN 9780199588459.
External links
- Havocscope Black Markets – Database and statistics on black market activities
- Official March 2000 French Parliamentary Report on the obstacles on the control and repression of financial criminal activity and of money-laundering in Europe by French MPs Vincent Peillon and Arnaud Montebourg, third section on "Luxembourg's political dependency toward the financial sector: the Clearstream affair" (pp. 83–111 on PDF version)
- The Underground Economy from National Center for Policy Analysis (1998)
- The Underground Economy: Global Evidence of Its Size and Impact (1997)
- The Effects of a Black Market Using Supply and Demand Archived March 26, 2009, at the Wayback Machine