Black Market

What It Means

The black market (also called the underground, unofficial, or shadow economy) refers to an area of economic activity where the buying and selling of goods and services is conducted illegally. Black-market trading occurs for various reasons. Many goods and services are simply illegal to sell; examples include cocaine, assault rifles, prostitution, the body parts of endangered animals, fake passports, and bootlegged (illegally recorded) CDs and DVDs. The general term for such goods is contraband. When people desire goods that they cannot obtain simply by going to a store and purchasing them, they are often willing to pay very high prices to anyone who can provide them. Correspondingly, many merchants and individuals are willing to risk breaking the law in order to earn substantial profits from selling contraband.

There is also black-market trading in legal goods. This arises to avoid certain government regulations, such as when cigarettes and alcohol are smuggled across borders to avoid import taxes (extra fees charged for bringing goods into a country) or when handguns are sold on the black market to avoid laws requiring their licensing and registration.

Another form of government regulation that often leads to black-market trading is rationing. When basic goods, such as meat and sugar, are in short supply (in wartime, for example), the government may place limits on the amount of that good that any individual can buy in order to make sure the supply gets distributed fairly and no one goes hungry. If individuals who want to buy more than the legal limit are willing to pay an extra price for this service, there will be merchants willing to ignore the government’s rationing limits to sell the goods for increased profit.

This illegal trade takes place in secret, or in the dark, hence the name “black market.” Because black-market trade occurs “off the books,” so to speak, it represents a whole sector of a country’s economy that cannot accurately be measured.

When Did It Begin

Illegal trading has existed for hundreds of years. In the early seventeenth century, for example, when Dutch and Portuguese traders first brought tea from China to Europe, it was considered a rare and highly desirable luxury. In Britain the government charged merchants a heavy import tax on tea, which made it very expensive to buy. An extensive black market in smuggled tea quickly arose, enabling merchants to avoid the tax and sell more tea at lower prices.

The term “black market” first appeared in print in The Economist magazine in 1931 in reference to an unofficial, or “black,” market in sterling exchange. Sterling is the word for British money, also called pound sterling. As with other trading, currency exchange (the conversion of one country’s currency to another’s, such as the conversion of British sterling into U.S. dollars) occurs on the black market in order to avoid government fees and regulations. The term began to be used widely during World War II (1939–45), when strict government rationing was widespread in Europe and illegal trade flourished.

More Detailed Information

Black markets function as they do because of the basic economic principle of supply and demand. Supply refers to the quantity of goods and services that businesses are willing and able to produce at any given time. Demand refers to the quantity of goods and services that consumers are willing and able to buy at any given time. The relationship between supply and demand does much to determine the price of a product. If supply of a product is greater than demand (say 500 concert tickets go on sale for $30 each, but only 150 tickets sell), it means that not enough people are willing to buy it. The theory of supply and demand suggests that, if the concert promoter had charged a lower price, she might have sold more tickets. On the other hand, if supply is lower than demand (say 500 concert tickets go on sale for $30 each, and 750 people line up to buy them), then the principle of supply and demand says that the promoter could have charged a higher price for the tickets.

It is with the latter scenario, when supply is limited, that a black market is likely to arise. Say the first 50 people in line buy 10 tickets each. The tickets are sold out, and 700 people still want to see the concert. The 50 people who bought the tickets would very likely be able to sell them off for more than $30 each. The practice of ticket resale (sometimes called scalping) is considered a black-market activity.

Similarly, by making a product illegal or imposing rations upon it, the government is restricting its supply. When a government imposes import tariffs, its aim is to restrict the supply of foreign goods coming into the country in order to give an advantage to manufacturers of the same product within the country (tariffs may also be a means of raising government revenue). Economists who favor a free-market economy (one in which trade is dictated purely by the law of supply and demand) believe that government interference in the market often causes more harm than good. By restricting the supply of goods, these critics contend, the government effectively assures the rise of a black market and a host of other criminal activities (including, in the drug trade, kidnapping, armed robbery, and murder) that are associated with secretive, high-risk, high-profit trading.

Another problem with driving certain goods into the black market is that, when these goods are sold in secret, there is no one to insure their quality or safety. During the late nineteenth and early twentieth centuries, for example, birth control products were banned in the United States under an antiobscenity law (the Comstock Act of 1873), and a black market arose to supply women with homemade contraceptives. Manufactured by amateurs with no proper oversight, many of these products were defective and even hazardous. While proponents of the Comstock Act believed that birth control products were immoral because they encouraged sexual promiscuity, those who defended women’s right to contraception argued that the Comstock Act itself was immoral because it subjected otherwise law-abiding women to the dangers of the black market.

Recent Trends

At the beginning of the twenty-first century, one of the fastest-growing areas of black-market activity was in the computer industry. Before 1998 most computer hacking (the practice of breaking through a computer’s security system) was done for sport by curious, but not malicious, individuals. In the next decade, however, there was rapidly increasing demand for stolen data (such as social security numbers, credit card numbers, corporations’ strategic plans, and classified military secrets), and as a result hacking was becoming a highly sophisticated business, delivering substantial profits for organized-crime associations.