Black market

A black market, underground economy, or shadow economy is a clandestine market or

transaction that has some aspect of illegality or is characterized by some form of noncompliant
behavior with an institutional set of rules. If the rule defines the set of goods and services whose
production and distribution is prohibited by law, non-compliance with the rule constitutes a black
market trade since the transaction itself is illegal. Parties engaging in the production or distribution of
prohibited goods and services are members of the illegal economy. Examples include the drug
trade, prostitution (where prohibited), illegal currency transactions and human trafficking. Violations
of the tax code involving income tax evasion constitutes membership in the unreported economy.[1][2]
Because tax evasion or participation in a black market activity is illegal, participants will attempt to
hide their behavior from the government or regulatory authority.[3] Cash usage is the preferred
medium of exchange in illegal transactions since cash usage does not leave a footprint.[4] Common
motives for operating in black markets are to trade contraband, avoid taxes and regulations, or skirt
price controls or rationing. Typically the totality of such activity is referred to with the definite article
as a complement to the official economies, by market for such goods and services, 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.

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 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.

Background

Mercado Negro, so called "Black Market", in La Paz, Bolivia.

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.

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. Four major underground economies can
be identified the informal economy

the illegal economy

the unreported economy

the unrecorded economy

The "illegal economy" consists of the income produced by those economic activities pursued in violation
of legal statutes defining the scope of legitimate forms of commerce. Illegal economy participants
engage in the production and distribution of prohibited goods and services, such as drug trafficking,
arms trafficking, and prostitution.

The "unreported economy" consists of those economic activities that circumvent or evade the
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 "tax gap", namely the difference between
the amount of tax revenues due the fiscal authority and the amount of tax revenue actually collected. In
the U.S. unreported income is estimated to be $2 trillion resulting in a "tax gap" of $450$500 billion.

The "unrecorded economy" consists of those economic activities that circumvent the institutional rules
that define the reporting requirements of government statistical agencies.[7] A summary measure of the
unrecorded economy is the amount of unrecorded income, namely the amount of income that should
(under existing rules and conventions) be recorded in national accounting systems (e.g. National Income
and Product Accounts) but is not. Unrecorded income is a particular problem in transition countries that
switched from a socialist accounting system to UN standard national accounting. New methods have
been proposed for estimating the size of the unrecorded (non-observed) economy.[10] But there is still
little consensus concerning the size of the unreported economies of transition countries.[11]

The "informal economy" comprises those economic activities that circumvent the costs and are
excluded from the benefits and rights incorporated in the laws and administrative rules covering
property relationships, commercial licensing, labor contracts, torts, financial credit and social security
systems.[7] A summary measure of the informal economy is the income generated by economic agents
that operate informally.[12][page needed][13] The informal sector is defined as the part of an economy
that is not taxed, monitored by any form of government, or included in any gross national product
(GNP), unlike the formal economy. In developed countries the informal sector is characterized by
unreported employment. This is hidden from the state for tax, social security or labour law purposes but
is legal in all other aspects.[14] On the other hand, the term black market can be used in reference to a
specific part of the economy in which contraband is traded.

Pricing[edit]

Goods acquired illegally may exchange above or below the price of legal market transactions:

They may be cheaper than legal market prices. The supplier does not have to pay for production costs or
taxes. This is usually the case in the underground economy. Criminals steal goods and sell them below
the legal market price, but there is no receipt, guarantee, and so forth.

They may be more expensive than legal market prices. For example, the product is difficult to acquire or
produce, dangerous to handle, or not easily available legally, if at all. If exchange of goods are made
illegal by some sort of state sanction, such as is often seen with certain pharmaceutical drugs, their
prices will tend to rise as a result of that sanction.
Black markets can form part of border trade near the borders of neighboring jurisdictions with little or
no border control if there are substantially different tax rates, or where goods are legal on one side of
the border but not on the other. Products that are commonly smuggled like this include alcohol and
tobacco. However, not all border trade is illegal.

Consumer issues

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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

Even when the underground market offers lower prices, consumers still have an incentive to buy on the
legal market when possible, because:

They may prefer legal suppliers, as they are easier to contact and can be held accountable for faults;

In some jurisdictions,[which?] customers may be charged with a criminal offense if they knowingly
participate in the black economy, even as a consumer;

They may feel in danger of being hurt while making the deal;[citation needed]

They may have a moral dislike of black marketing;

In some jurisdictions (such as England and Wales), consumers in possession of stolen goods will have
them taken away if they are traced, even if they did not know they were stolen. Though they themselves
commit no offense, they are still left with no goods and no money back. This risk 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 can actually be in a better situation when using black market
services, particularly when government regulations and monopolies hinder what would otherwise be a
legitimate competitive service. For example:

Unlicensed taxicabs. In Baltimore, it has been reported that many consumers actively prefer illegal taxis,
citing that they are more available, convenient, and priced fairly.

Traded goods and services

Some examples of underground economic activities include:

Sexual exploitation and forced labor

Main article: Human trafficking

Illegal drugs

In the U.S., cannabis has been termed as a cash crop.

Main article: Illegal drug trade

From the late 19th and early 20th centuries, many countries began to ban the keeping or using of some
recreational drugs, such as the United States' war on drugs. Many people nonetheless continue to use
illegal drugs, and a black market exists to supply them. Despite law enforcement efforts to intercept
them, demand remains high, providing a large profit motive for organized criminal groups to keep drugs
supplied. The United Nations has reported that the retail market value of illegal drugs is $321.6 billion
USD.

Although law enforcement agencies intercept a fraction of the illegal drugs, and incarcerate hundreds of
thousands of wholesale and retail sellers, the very stable demand for such drugs and the high profit
margins encourages new distributors to enter the market without a decrease in the retail price. Many
drug legalization activists draw parallels between the illegal drug trade and the Prohibition of alcohol in
the United States in the 1920s.

Prostitution

Prostitution is illegal or highly regulated in many countries across the world. These places form a classic
study of 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.[19] 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.[20]

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 cheaper without regard for the legal requirements or procedureshealth checks, standards of
accommodation, and so on.

In other countries, such as Nicaragua, where legal prostitution is regulated, hotels may require both
parties to identify themselves, to prevent the rise of child prostitution.
Weapons

Main article: Arms trafficking

A tower of confiscated smuggled weapons about to be set ablaze in Nairobi, Kenya

The legislatures of many countries forbid or restrict the personal ownership of weapons. These
restrictions can range from small knives to firearms, either altogether or by classification (e.g. caliber,
handguns, automatic weapons, etc.), and explosives. The black market supplies the demands for
weaponry that can not be obtained legally, or may only be obtained legally after obtaining permits and
paying fees. This may be by smuggling the arms from countries where they were bought legally or
stolen, or by stealing from arms manufacturers within the country itself, using insiders. In cases where
the underground economy is unable to smuggle firearms, they can also satisfy requests by gunsmithing
their own firearms. Those who may buy this way include criminals to use for illegal activities, gun
collectors, and otherwise law-abiding citizens interested in protecting their dwellings, families or
businesses.

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. Another
segment of the population who may purchase weapons on the black market are individuals who are
unable to pass the legal requirements for registrationconvicted felons or those suffering from mental
illness for example. In some jurisdictions, collectors may legally keep antique weapons made incapable
of being readily restored to a firing condition.

Illegally logged timber

Main article: Illegal logging

The illegal logging of timber has posed as an issue. According to Interpol, the illegal logging industry is
worth almost as much as drug production industry, in some countries.

Animals and animal products

Main articles: Ivory trade and Wildlife trade

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 of the states within the United States, laws requiring the pasteurization of milk has created
black market situations involving the transport and sale of raw milk.
Alcohol

Main article: Rum-running

Broken barrels of liquor after a police raid in 1925, in Elk Lake, Ontario

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 within a particular jurisdiction. 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.[23][24] The term "rum-
running" most likely originated at the start of Prohibition in the United States (19201933), when ships
from Bimini in the western Bahamas transported cheap Caribbean rum to Florida speakeasies. But rum's
cheapness made it a low-profit item for the rum-runners, and they soon 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 in contraband in a single run.

Tobacco

It has been reported that smuggling one truckload of cigarettes from a low-tax US state to a high-tax
state can lead to a profit of up to $2 million.[25] The low-tax states are generally the major tobacco
producers, and have come under enormous 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.[26] But South Carolina has so far refused to follow suit and
raise taxes from seven cents per pack (the lowest in the USA).

In the UK, it has been reported that "27% of cigarettes and 68% of roll your own tobacco [is] purchased
on the black market".

Biological organs

Main article: Organ trade Illegal organ trade

According to the World Health Organization (WHO), illegal organ trade occurs when organs are removed
from the body for the purpose of commercial transactions. The WHO justifies these actions by stating,
"Payment for ... organs is likely to take unfair advantage of the poorest and most vulnerable groups,
undermines altruistic donation and leads to profiteering and human trafficking." Despite these
ordinances, it was estimated that 5% of all organ recipients engaged in commercial organ transplant in
2005. Research indicates that illegal organ trade is on the rise, with a recent report by Global Financial
Integrity estimating that the illegal organ trade generates profits between $600 million and $1.2 billion
per year with a span over many countries.
Racketeering

Main article: Racket (crime)

A racket is a service that is fraudulently offered to solve a problem, such as for a problem that does not
actually exist, that will not be put into effect, or that would not otherwise exist if the racket did not
exist. Conducting a racket is racketeering.[32] Particularly, the potential problem may be caused by the
same party that offers to solve it, although that fact may be concealed, with the specific intent to
engender continual patronage for this party. An archetype is the protection racket, wherein a person or
group (e.g., a criminal gang) indicates to a store owner that they could protect her store from potential
damage, damage that the same person or group would otherwise inflict, while the correlation of threat
and protection may be more or less deniably veiled, distinguishing it from the more direct act of
extortion. Racketeering is often associated with organized crime, and the term was coined by the
Employers' Association of Chicago in June 1927 in a statement about the influence of organized crime in
the Teamsters union.

Transportation providers

Main article: illegal taxicab operation

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 that is, taxicabs must get a special license and display it on a medallion in the vehicle. This has
led to a market in Carpooling/illegal taxicab operation, although in most jurisdictions it is not illegal to
sell the medallions.[citation needed] In Baltimore, Maryland, for example, it is not uncommon for
private individuals to provide illegal taxicab service for city residents.

Housing rental

In places where there is rent control there may be a black market for housing. For instance, in the UK
there is illegal subletting of social housing homes where the tenant illegally rents out the home at a
higher rent.[34] In Sweden, rental contracts with regulated rent can be bought on the black market,[35]
either from the current tenant or sometimes directly from the property owner. Specialised black-market
dealers assist the property owners with such transactions.[36] In India, places like Kota, New Delhi
where students are coming from all over India, getting high rented PG (paying guests) or other forms of
rented apartments without any taxation or regulations.
Counterfeit medicine, essential aircraft and automobile parts

Main article: Counterfeit consumer goods

Medicines and essential aircraft and automobile parts (e.g. brakes, motor parts, ...) are counterfeited on
a large scale.

Street vendors in countries where there is little enforcement of copyright law, particularly in Asia and
Latin America, often sell deeply discounted copies of films, music CDs, and computer software such as
video games, sometimes even before the official release of the title. A determined counterfeiter with a
few hundred dollars can make copies that are digitally identical to an original and face no loss in quality;
innovations in consumer DVD and CD writers and the widespread availability of cracks on the Internet
for most forms of copy protection technology make this cheap and easy to do.

Copyright-holders and other proponents of copyright laws have found this phenomenon hard to stop
through the courts, as the operations are distributed and widespread,[citation needed] transversing
national borders and thus legal systems. Since digital information can be duplicated repeatedly with no
loss of quality, and passed on electronically at little to no cost, the effective underground market value
of media is zero, differentiating it from nearly all other forms of underground economic activity. The
issue is compounded by widespread indifference to enforcing copyright law, both with governments and
the public at large. To steal a car is seen as a crime in most people's eyes, but to obtain unauthorized
copies of music or a game is not.[37] Additionally, not all people agree with 'copyright laws', as it
unfairly criminalises competition, allowing the copyright-holder to effectively monopolise related
industries. It also authorises copyright-holders to use region-coding to discriminate against selected
populations price-wise and availability-wise.

The comparison to car-theft, although common, is not truly analogous. Automobile theft results in an
item being removed from the owner with the ownership transferred to a second party. Media piracy is a
crime of duplication, with no physical property being stolen. Copyright infringement law goes as far as to
deem illegal "mix-tapes" 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 some work
for creating their copyrighted material and they wish to get compensated for their work. No other
system than copyright has been found to compensate the artists and other creators for their
work[citation needed], and many artists do not have any alternative source of income or another job.
Many artists and film producers have accepted the role of piracy in media distribution.[38] The spread
of material through file sharing is a major source of publicity for artists and has been shown to build fan
bases that may be more inclined to see the performer live[39] (live performances make up the bulk of
successful artists' revenues,[40] however not all artists can make live performances, for example
photographers typically only have a single source of income that is the licensing of their photos).
Currency

Main article: Fixed exchange rate

Money itself is traded on the black market. This may happen for one or more of several reasons:

The government sets ("pegs") the local currency at some arbitrary level to another currency that does
not reflect its true market value.

A government makes it difficult or illegal for its citizens to own much or any foreign currency.

The government taxes exchanging the local currency with other currencies, either in one direction or
both (e.g. foreigners are taxed to buy local currency, or residents are taxed to buy foreign currency).

The currency is counterfeit.

The currency has been acquired illegally and needs to be laundered before the money can be used.[41]

A government may officially set the rate of exchange of its currency with that of other currencies,
typically the US dollar. When it does, the peg often overvalues the local currency relative to what its
market value would be if it were a floating currency. Those in possession of the "harder" currency, for
example expatriate workers, may be able to use the black market to buy the local currency at better
exchange rates than they can get officially.

In situations of financial instability and inflation, citizens may substitute a foreign currency for the local
currency. The U.S. dollar is viewed as a relatively stable and safe currency and is often used abroad as a
second currency. In 2012, $340 billion, roughly 37 percent[42] of all U.S. currency, was believed to be
circulating abroad.[43] The most recent study of the amount of currency held overseas suggests that
only 25 percent of U.S. currency is presently held abroad.[44] The widespread substitution of U.S.
currency for local currency is known as de facto dollarisation, and has been observed in transition
countries such as Cambodia[45] and in some Latin American countries.[46] Some countries, such as
Ecuador, abandoned their local currency and now use US dollars, essentially for this reason, a process
known as de jure dollarization. See also the example of the Ghanaian cedi from the 1970s and 1980s.

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, it is
also a convenient medium of exchange for both illegal transactions and for unreported income both in
the U.S and abroad.[47]

More recently cryptocurrencies such as bitcoin have been used as medium of exchange in black market
transactions. Cryptocurrencies are sometimes favored over centralized currency due to their anonymous
nature and their ability to be traded over the internet.[48]
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 Republic of Ireland and Northern Ireland, there has often been a black market in petrol and
diesel.[49][50] The direction of smuggling can change depending on the variation of the taxes and the
exchange rate between the Euro and 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 dyed fuel, because a coloured dye is added so it can be detected
if used in other vehicles (e.g. a red dye in the UK, a green dye in Ireland). Nevertheless, the saving is
attractive enough to make a black market in agricultural diesel. In 2007 it was estimated that 350
million was not gained in profit as a result of this phenomenon, in the UK.[51]

in countries like India and Nepal, the price of fuel is set by the government, and it is illegal to sell the fuel
over the set price. Due to the petrol crisis in Nepal, black marketing in fuel has been a common trend,
especially during mass petrol shortage. At times, people need to queue for hours or even sometimes
overnight to get the fuel. On the other hand, the petrol pump operators are alleged to hoarding the fuel,
and selling it to black marketers. Black marketing in vehicle/cooking fuel became widespread during the
2015 economic blockade imposed on Nepal. Even after the economic blockade was eased, and petrol
imports resumed, people are not getting the fuel as they were supposed to and are resort to buying
from the black market.

https://en.wikipedia.org/wiki/Black_market