Black Market: Definition & Effects on the Economy

Black Market: Definition & Effects on the Economy
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  • 0:01 Definition of the Black Market
  • 1:10 Impact on the Economy
  • 2:31 Impact on Entertainment
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

As you'd expect, not everything bought and sold is transparent and reported, between a legitimate buyer and seller. In this lesson, we'll discuss the 'black market,' a market that some estimate is 10% of the U.S. economy.

Definition of the Black Market

The black market is the 'market' where goods and services are sold in a way that is illegal or for goods and services that are illegal. Obviously, it isn't a market in the physical sense of the word, but rather, a market meaning the collective transactions that take place between buyers and sellers.

There are some obvious goods and services that flow through their own black market: guns, drugs, some antiques and artifacts, and even human trafficking. But, there are also black markets for things that are legal to own, but buyers and sellers just want to avoid either high taxes or any record of them buying something.

A new term, the gray market is sometimes referred to when the ownership of the item is legal, but the way it was purchased was illegal. While some people may refer to the gray market, when economists talk about the impact of the black market, they are included transactions like marijuana from a drug dealer in their analyses.

A very clear example of the black market would be something like illegal drugs, arsenic, or nuclear material. Those are all items that are illegal for individuals to own, and illegal for individuals to sell.

Impact on the Economy

Just because the black market is full of illegal goods and transactions, doesn't mean it operates in isolation. Money goes in and out of the black market, so it does impact the real economy. One of the most significant ways is through employment. Some estimates place the worldwide employment in the black market at 15%-18%. Imagine if that many people, throughout the world, were unemployed. There would be some offsetting, as the volume of trade in the black market moved to the normal economy, but it would leave a lot of people not working.

Depending on the goods and services, the black market can also impact supply and demand for an individual firm. There are two good examples of this impact. First, the black market of guns. Because it is such a large black market, gun manufacturers don't use gun owners as a basis for measuring their target market. Instead, they identify their wholesale numbers (the number of guns they sold to stores), so that they are basing their forecasts and estimates on legal sales.

If gun manufacturers projected their sales based on the number of gun owners, they would over produce, because they wouldn't be accounting for those bought and sold on the gray market - for example people selling Craigslist or just putting an ad in the local classifieds. Firearm manufacturers need to consider the black (or gray) market for guns when they decide what to supply, since like it or not, illegal gun sales are taking away from their own, legal sale of guns.

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