Transcript Black Markets - Ken Szulczyk

Black Markets
From Lecture Notes
Lesson #3
Black Markets
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Also called
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Shadow economy
Hidden economy
Government price controls, regulations,
and taxes can lead to black markets
Black Markets
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Black Market - market that operate outside
the legal system.
Reasons
1. Illegal products and services.
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Drugs, prostitution, gambling, smuggling, etc.
Black Markets
Reasons
2. Avoid high taxes
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Barter - one person trades a good or service with another
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No money is exchanged
No taxes
Person or business under reports income and assets, or
over states debt
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Claiming children on U.S. federal tax forms, lowers taxes;
Some people claimed their animals as children
Black Markets
Reasons
3. Circumvent price controls.
4. Avoid costly regulations.
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Labor markets are highly regulated in many
countries
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Many U.S. employers hire foreigners (from
Mexico) that do not have proper documents to
work legally in U.S.
Employers pay lower wages
Black Markets
Reason
5. Decline of civic loyalty to government
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People start to lose respect for their government
institutions
Wide spread political corruption
Black Markets
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Black markets have:
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More defective products.
Higher profits.
Higher risk:
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Arrests.
Court fines and fees.
Jail or prison sentence.
Greater violence from enforcing contracts.
Problems of Black Markets
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Problems if there is a sizable shadow
economy
Decreases the tax base and tax collections
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Leads to higher tax rates
Government invests less in infrastructure, like
roads, bridges, etc.
Government statistics are inaccurate
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Unemployment is higher than should be
Size of Hidden Economy
Size of Hidden Economy
1990 - 1993
% of Real GDP
Nigeria
68 to 76%
Mexico
40 to 60%
Russia
20 to 27%
Hong Kong
13%
United States
8 to 10%
Japan
8 to 10%
Be careful of results; hard to measure
Measuring Black Markets
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People in black markets will not honestly
disclose their activities
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How could you measure the size of a
hidden economy?
Conclusion
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Decrease size of black markets and lower gov.
corruption
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Removing price controls
Lowering tax rates
Reducing regulations
Fostering competition
This interesting fact is the shadow economy
appears to be growing in many countries including
the U.S.