Black Markets From Lecture Notes Lesson #3. Black Markets Also called Shadow economy Hidden economy Government price controls, regulations, and taxes.

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Presentation transcript:

Black Markets From Lecture Notes Lesson #3

Black Markets Also called Shadow economy Hidden economy Government price controls, regulations, and taxes can lead to black markets

Black Markets Black Market - market that operate outside the legal system. Reasons 1. Illegal products and services. Drugs, prostitution, gambling, smuggling, etc.

Black Markets Reasons 2. Avoid high taxes Barter - one person trades a good or service with another No money is exchanged No taxes Person or business under reports income and assets, or over states debt 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. Labor markets are highly regulated in many countries 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 People start to lose respect for their government institutions Wide spread political corruption

Black Markets Black markets have: More defective products. Higher profits. Higher risk: Arrests. Court fines and fees. Jail or prison sentence. Greater violence from enforcing contracts.

Problems of Black Markets Problems if there is a sizable shadow economy Decreases the tax base and tax collections Leads to higher tax rates Government invests less in infrastructure, like roads, bridges, etc. Government statistics are inaccurate Unemployment is higher than should be

Size of Hidden Economy Size of Hidden Economy % of Real GDP Nigeria68 to 76% Mexico40 to 60% Russia20 to 27% Hong Kong13% United States8 to 10% Japan8 to 10% Be careful of results; hard to measure

Measuring Black Markets People in black markets will not honestly disclose their activities How could you measure the size of a hidden economy?

Conclusion Decrease size of black markets and lower gov. corruption 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.