key term - Black Market

Definition

A black market is an illegal, underground market where goods and services are traded outside of the formal, regulated economy. It typically involves the sale of prohibited items or the circumvention of price controls, taxes, or other government regulations.

5 Must Know Facts For Your Next Test

1. Black markets emerge when governments impose price ceilings or price floors that create shortages or surpluses of certain goods and services.
2. Participants in black markets often face legal consequences, such as fines or imprisonment, for engaging in these transactions.
3. Black markets can undermine the effectiveness of government policies and reduce tax revenue, leading to further economic distortions.
4. The goods and services traded on black markets are typically in high demand but limited in supply due to government regulations or prohibitions.
5. Black markets can be driven by a desire to avoid taxes, obtain scarce or banned goods, or engage in activities that are deemed illegal by the government.

Review Questions

• Explain how price ceilings can lead to the creation of a black market.
  • When the government imposes a price ceiling, which is a legal maximum price for a good or service, it can create a shortage in the market. This shortage leads to a higher demand for the good or service than the regulated supply can satisfy. As a result, a black market may emerge, where buyers and sellers can trade the good or service at a higher, unregulated price, circumventing the price ceiling. The black market allows the good or service to reach its equilibrium price, but it does so outside the formal, regulated economy.
• Describe the role of arbitrage in the operation of a black market.
  • Arbitrage, the practice of taking advantage of price differences between markets, is a key driver of black market activity. When there is a price differential between the regulated, legal market and the unregulated, black market, arbitrageurs can profit by buying the good or service in the legal market at the lower, controlled price and then selling it in the black market at the higher, unregulated price. This arbitrage activity helps to connect the black market to the formal economy and can contribute to the persistence and growth of the black market.
• Evaluate the broader economic and social implications of the existence of a black market.
  • The presence of a black market can have significant economic and social consequences. Black markets undermine the effectiveness of government policies, such as price controls and taxes, by allowing goods and services to be traded outside of the regulated system. This can lead to further economic distortions, reduced tax revenue, and a loss of government control over the allocation of resources. Socially, black markets can foster criminal activity, promote the distribution of unsafe or illegal goods, and erode public trust in government institutions. Additionally, the existence of a black market can exacerbate income inequality as those with the means to participate in the black market may benefit at the expense of those who cannot access it.

Related terms

Informal Economy: The part of an economy that is neither taxed nor monitored by any form of government, often referred to as the shadow economy.

Price Controls: Government-mandated minimum or maximum prices set for specific goods or services, which can lead to the creation of a black market.

Arbitrage: The practice of taking advantage of a price difference between two or more markets, by buying and selling the same asset in different markets to profit from the difference.