Black Market

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Definition of a Black Market:

A Black Market is a market where goods or services are traded illegally, either because the product is illegal (such as harmful recreational drugs) or the price exceeds the price ceiling.

Detailed Explanation:

The black market is larger than the economies of many countries. Some estimate that the black market comprises 15 percent of the world's GDP. A black market is frequently called an underground economy, because the transactions illegally bypass the government. It is the transaction, and not necessarily the good or service that makes the black market illegal. For example, alcohol or cigarettes may be smuggled into the United States and sold at less than they could be legally. The smuggler avoids the excise tax. The goods are not illegal, but the transaction is illegal. Prescription drugs are not illegal, but there is a thriving black market where prescription drugs are resold. Drug trafficking, trading illegally in arms, and prostitution are all part of the black market. Smuggling refugees across borders is another example of a black market. States have generated tax revenues by legalizing black market items. Many states are considering the legalization of marijuana to increase tax revenues. Colorado received almost $70 million dollars in tax revenue from the sale of marijuana during the fiscal year 2014 and 2015. This is more than the tax revenue generated from alcohol sales.

Many black market transactions are widely accepted. For example, paying much higher than the market price for a scalped ticket or paying less than the market price for a stolen good. Paying cash for a service to avoid taxes is a black market transaction. Black markets may emerge when price controls are established. For example, assume the rent ceiling for an apartment is $400 per month. George rents the apartment but is willing to sublet it to Mary for $700 per month. (Subletting property is illegal with rent control.) George does not know Mary, but he knows Bob, who arranges these illegal deals for a fee. Bob, George, and Mary operate outside the law in the black market. 

Dig Deeper With These Free Lessons:

Supply and Demand - The Costs and Benefits of Price Controls
Gross Domestic Product - Measuring an Economy's Performance

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