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"Black market" redirects here. For other uses, see Black market (disambiguation).
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The underground economy or black market is a market consisting of all commerce on which applicable taxes and/or regulations of trade are being evaded. The term is also often known as the underdog, shadow economy, black economy or parallel economy.
The market consists mainly of prohibited commerce, e.g. drugs, prostitution, weapons and gambling, and tax-evasive trade of legal goods and services, e.g. money laundering. In order to evade traceability by governments, underground economy transactions are typically cash transactions or complex financial operations, involving the use of multiple subsidiaries and tax havens.
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Measurement of the size of the underground economy is subject to a large margin of error. Economists seeking to measure its size have often looked at the volume of cash in circulation, although a large part of the underground economy takes place via bank accounts located in tax havens. Discrepancies between the growth of officially reported spending (GDP) and the growth of cash in circulation may be used to infer growth in the size of the underground economy, but these estimates are subject to a considerable amount of judgement, and are controversial.
The growth of online commerce may have increased the size of the underground economy. The auctioning website, eBay has over 40 millions of regular users. The sellers are legally responsible to pay taxes,Going Underground: America’s Shadow Economy. FrontPage magazine (January 2005). however it is speculated that these can be easily evaded[citation needed].
The underground economy, when trading decisions are not the result of coercion, is arguably a free market, since, by definition, it lacks governmental intervention. However, various governments have engaged themselves in the underground economy[citation needed], thus blurring the line between public intervention and its absence.
Goods acquired illegally can take one of two price levels:
Even when the underground market offers lower prices, the consumers are likely to continue the purchase of the legal counterparts, due to the following reasons:
The popular black market goods include:
Beginning in the 19th and 20th centuries, many countries began to ban the possession or use of various recreational drugs, such as the United States’ famous “war on drugs.” Many people nonetheless continue to use illegal drugs, and a black market exists to supply them. Despite ongoing law enforcement efforts to intercept illegal drug supplies, demand remains high, providing a large profit motive for organized criminal groups to ensure that drugs are available. The United Nations has reported that the retail market value of illegal drugs is worth 321.6 billion dollars. [1] While law enforcement efforts do capture a small percentage of the distributors of illegal drugs, the high and very inflexible demand for such drugs ensures that black market prices will simply rise in response to the decrease in supply—encouraging new distributors to enter the market in a perpetual cycle. Many drug legalization activists draw parallels between the United States’ experience with alcohol Prohibition and the current bans on various psychoactive drugs.
Prostitution is illegal in many nations and regions throughout the world. However, as market demand for the illegal services of prostitutes remains high, black markets are usually found catering to such demands. Prostitutes in such areas generally operate with some degree of secrecy, sometimes negotiating price and activities through codewords and subtle gesture. Additionally, in areas such as the Netherlands where prostitution is legal but carefully regulated, illegal prostitutes exist whose services are offered without regard for legal requirements or procedures. In Nicaragua legal prostitution is regulated and most upscale hotels require identification of both parties involved to help prevent the growing percentage of child prostitution.
The legislatives of a most countries, forbid or restrict the ownership of personal arms. These can range from cold steel weapons, exceeding certain sizes, to firearms, either altogether or by classification (e.g. calibre, automatism, etc), to explosives. The black market can supplies such demands, by smuggling the arms from countries, where they were either purchased legally or stolen. The purchase of personal arms via these channels can be of use to individuals participating in criminal activities, those desiring additional protection against the prior and weapon collector.
Black markets can also form near when neighboring jurisdictions with loose or no border controls have substantially different tax rates on similar products. Products that are commonly smuggled to fuel these black markets include alcohol and tobacco.
It has been reported that smuggling one truckload of cigarettes from a low-tax U.S. state to those jurisdictions of the same country with the highest taxes can lead to a profit of up to $2 million. [2] The low-tax states are generally the major tobacco producers and have come under enormous criticism for their reluctance to increase taxes from their minimal rates. North Carolina eventually agreed to raise its taxes from 5 cents per pack to 35 cents, although this remains far below the national average. [3] However, South Carolina has thus far refused to follow suit and raise their taxes from seven cents per pack (currently the lowest in the U.S.A.) [4] Some law enforcement officials have expressed concern that the profits from tobacco smuggling may be directed to terrorist organizations. This has led to calls for the U.S. Congress to intervene by setting mandatory minimum tobacco taxes for all states.
Street vendors in many third world countries, particularly in Asia where loose enforcement of copyright law exists, often sell deeply discounted copies of movies, music CDs, and computer software such as video games, sometimes long before the official release of a title. Innovations in consumer DVD and CD burners and the widespread availability on the Internet of cracks for most extant forms of copy protection technology allow anyone with a few hundred dollars to produce DVD and CD copies that are digitally identical to an original and suffer no loss in quality.
Such operations have proven very difficult for copyright holders to combat legally, due to their decentralized nature and the cheap widespread availability of the equipment needed to produce illegal copies for sale. Widespread indifference towards the enforcement of copyright law on the part of law enforcement officials outside of First World countries, as well as social acceptance, further compounds the issue there.
In the case of the legal prohibition of a product viewed by large segments of the society as harmless, such as alcohol under prohibition in the United States, the black market can prosper, allowing the black marketeers can reinvest profits in a widely diversified array of legal or illegal activities, well beyond the original item.
Underground markets can be reduced or eliminated by removing the relevant legal restrictions, thereby increasing the supply and quality of formerly banned goods, e.g. marijuana-trade debate. Removing legal restrictions will usually reduce the price of the goods in question, possibly resulting in more of them being bought and sold. This can be beneficial to the state, as the state:
This can, however, be seen by some people as the equivalent of legalising crime, in order to reduce the number of “official” criminal activities.
Black markets flourish in most countries during wartime. Most states engaged in total war or other large-scale, extended wars must necessarily impose restrictions on domestic use of critical resources, which are needed for the war effort, such as food, gasoline, rubber, metal, etc., typically through rationing. In most cases, a black market develops to supply rationed goods at exorbitant prices. The rationing and price controls enforced in many countries during World War II encouraged widespread black market activity.
During the Vietnam war, soldiers would spend MPC (military money) on maid service and sexual entertainment[citation needed], thus supporting their partners and their families. If the local then wanted consumer goods, which were sparse in the civil stores due to governmental import controls, he would purchase them for the double price from one of the soldiers, who owned a monthly ration card and thus had access to the military stores.[citation needed] The transactions ran through the on-base maids to the local populance. Despite the fact that these activities were illegal, only flagrant or large scale black marketers were prosecuted by the military.[citation needed]
Prohibition period in the early twentieth century in the United States is a classic example of the creation of a black market, its activity while the affected good has to be acquired on the black market, and its end. Many organized crime groups took advantage of the lucrative opportunities in the resulting black market in banned alcohol production and sales. Since much of the populace did not view drinking alcohol as a particularly harmful activity (that is, consumers and its traders shouldn’t be treated like conventional criminals), illegal speakeasies prospered, and organizations such as the Mafia grew tremendously more powerful through their black market activities distributing alcohol.
This effect similarly is seen today, when jurisdictions pass bans on smoking in bars and restaurants. In such jurisdictions, smokeasies (businesses, especially barrooms, which allows smoking despite the legal prohibition) frequently arise. This phenomenon is very prevalent in many jurisdictions with smoking bans, including California,“California’s Ban to Clear Smoke Inside Most Bars,” The New York Times, December 31, 1997“The Land of Smoke-Easies, $500 Barfs,” The San Francisco Chronicle, May 15, 1998 Philadelphia,“‘Smoke-easys’ ignore the tobacco ban”, Philadelphia Inquirer, March 27, 2007“Smoke-easies”, Fort Wayne News-Sentinel, March 28, 2007 Dublin,“Warning over ‘smoke-easy’ lock-ins,” The Scotsman, August 29, 2006 Utah,“Everyone Head for the Smoke-Easy,” Utah Statesman, December 12, 2006 Seattle,“Smokers find refuge in secret nicotine dens”, Seattlepi.com, May 31, 2006 Scotland,“Speakeasies? Nah, smoke-easies”, The Toronto Sun, May 25, 2006 Ohio,“smoke-easies, altoid tins, blue moon, janis joplin and vivid imaginations” Yellow Is The Color Blog and Washington, D.C..“Smoke-easies offer cover from puff police; Aficionados just want a place to light up, relax,” The Washington Times, November 20, 2003
The Clearstream scandal is an example of such tax evasion. Based in Luxembourg, Clearstream practices financial clearing, which means it centralises operations of multiple banks, some based in tax havens.
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