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.
The black market is larger than the economies of many countries. Some economists estimate that the black market comprises 15 percent of the world’s GDP. A black market is also called an underground economy because the transactions illegally bypass the government. The transaction, not necessarily the good or service, makes the black market illegal. For example, a smuggler may want to avoid an excise tax by smuggling alcohol or cigarettes into the United States and selling them at less than they could be legally. The goods are not illegal, but the transaction is prohibited. Prescription drugs are not illegal, but a thriving black market exists to resell prescription drugs. 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 in tax revenue from the sale of marijuana during the fiscal years 2014 and 2015—more than the tax revenue generated from alcohol sales.
Other common black market transactions include a person 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 also a black market transaction. Price controls can spawn a black market. For example, assume the rent ceiling for an apartment is $400 per month. George rents the apartment and 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.
Supply and Demand – The Costs and Benefits of Price Controls
Gross Domestic Product – Measuring an Economy's Performance
