Black Market, Black Economy, Grey Market, Gray Market

By: EconomyWatch   Date: 23 November 2010

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A black market is one where the buying and selling of products and services take place in an illegal manner. A black economy is a highly organized and vast market where the regular taxation rules and norms of trade are not adhered to. A black market is known by several names, including black economy, underground market, shadow economy, underdog and parallel economy. The variety of goods traded in this market is enormous and the most commonly traded black market items are:

  • weapons
  • currency
  • electronics and watches
  • fashion goods (perfumes, jewelry and bags)
  • clothes and accessories
  • pirated media (CDs and DVDs for music, films and software)
  • drugs
  • alcohol
  • tobacco

Parallel Economy

A black market may also be called a parallel economy because of its disregard for the rules and regulations that ‘white’ businesses follow. Goods sold in the black market can be illegal (such as weapons, drugs or stolen goods). On the other hand, legal goods can be sold illegally (goods sold without proper license and without paying any kind of taxes).

In the black market goods and services are purchased and sold violating all restrictions like rationing or price controls. So, the transactions that take place in this market are “under the table” transactions, which occur outside government-sanctioned channels.

Grey Market

A grey market involves the buying and selling of goods and services that are not illegal, but the channels used in their distribution are either unauthorized or unofficial. A good example is the trading of crude oil by an individual. The grey market includes services that are typically unregistered to evade taxes. Perfectly legitimate occupations, such as domestic help, babysitters, part time beauticians and freelancers, may not be registered. Not only is it difficult to detect such defaulters, the punishment is usually mild.

Factors that Support Black Markets

The stricter the government regulations are in a country, the great the impetus is for a parallel economy. Corruption, shortages and monopolies also act as catalysts for the black market.

Parallel economies are further encouraged by periods of war or any other crisis. During harsh political conditions or natural disasters, scarce goods are rationed by the government. People have the tendency to violate restrictions or rationing laws to secure the products they desire.

Black Market Prices

The price of certain goods sold in a black market could be lower than the legal market price. This is because the good may be stolen. Moreover, black marketers do not pay any taxes and can offer a price advantage to customers. Goods such as pirated DVDs and fashion accessories are sold at a lower price in the black market. On the other hand, the price of certain products sold in the black market can be higher than the normal prices. This is usually the case when there are shortages or there is high risk involved in getting the goods to the customer. Goods such as weapons and illegal drugs are good examples.

Despite the price advantage offered by the black market for certain goods, some people prefer to buy items from the legal market, even at a higher price. The reasons for this could be:

  • the black market may not provide proper documents (invoice, licenses, instruction manuals)
  • unwillingness to support an unlawful act
  • nowhere to turn to if the products do not perform as promised
  • brands may be fake
  • no after sales support

Black market activities can be reduced by the easing of legal restrictions and by increasing the availability of goods. Making regulations less stringent would encourage buying and selling, exerting downward pressure on prices. This would dissuade people from purchasing the goods from the black market. In cases where a government believes that the sale of certain goods should be restricted (such as ammunition, drugs and human trafficking), stricter law enforcement and awareness spreading can restrict the black market.

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