Black Market Economics - What Drives the Underground Economy?

the underground economy is one of the largest and most influential markets in the world the sale of everything outside of the law is by its very nature hard to track but reputable sources peg at that well into the trillions of dollars per year that's bigger than the market for fast food movies fashion and smartphones combined many times over this is something that can genuinely impact entire nations not only do black market activities come with a significant human cost but the economic forces involved can easily make the difference between a successful economy and a struggling economy we have seen the positive and negative impacts that oil and gas discoveries can have on national economies but black market revenues in 2019 rivaled these revenues worldwide so it's not unreasonable to assume that the impacts would be just as great to truly explore these industries though we as always have to understand what makes the black market function so what is the black market and spoiler alert it's a lot more than just selling drugs why is it so large and influential what are the best ways to practically combat these illicit trades and if you were so inclined how would one carve out a little bit of black market profit all of their own this episode of economics explain was made possible by our fans on patreon because let's be honest this one is definitely getting demonetized this has been one of the most requested videos amongst our patron team if you would like to have your say about what topic we explore next even if it is a video like this one please consider supporting the channel on patreon.com economics explained when someone thinks of the black market their mind will immediately race too mafia bosses running protection rackets or pablo escobar with his mountains of ill-gotten gains now these are certainly parts of the black market but they do not define it in reality the black market is the result of regulatory rigidities controlled substances guns ill-gotten kidneys and fake passports are all illegal to own illegal to buy and illegal to sell this is a very direct way that a government can control a consumer market any type of transaction involving these items is not sanctioned and the punishments are pretty severe for trying to accommodate these sales this means three things one that these transactions cannot be legally recognized you can't pay taxes on them and you will most likely need to launder any money you make from them two the parties involved will have to accept a cost premium due to the risks involved in not having enforceable contracts meaning that if someone does you are dirty in one of these deals it's up to you to seek compensation because well obviously you can't go and do it through a court this can be risky and expensive and three the parties involved will have to accept a cost premium due to the inherent risk reward trade-off of dealing with items that could get you 25 years to life so the black market for outright illegal goods is filled with costly items sold by people with the means to defend themselves and are not necessarily afraid of prison right well yes but the black market is not entirely made up of these types of very obviously illegal items one of the largest underground markets in the world is for counterfeit goods in 2016 this market rivaled the size of the drug trade now counterfeit goods are still illegal but for different reasons nobody's gonna od on fake yeezys and you can't haze someone with a fake rolex so they are inherently less dangerous to have in circulation but they defy intellectual property rights when a company designs a shoe or a watch or even makes a video to put onto the internet they have the right to exclusively share that intellectual property because of this exclusivity they are often able to charge a premium for their funny shoes plain looking watches or australian sounding economics commentary this premium allows designers innovators and content creators to profit off the time and effort they spent developing the product that they are bringing to market this premium also means that it's very easy for a copycat to come in and replicate the product without having to invest into the development and undercut the innovator oftentimes counterfeit goods are of extremely inferior quality but other times they are indistinguishable authorities from around the world are very keen to crack down on this market because undercutting genuine innovation means that one there is no profit incentive to invest into research and development and two the businesses that are innovating will be priced out so they won't be able to continue innovating this is often seen as a pretty benign market given that the only victims are high-priced fashion houses media studios and poor poor youtubers but in all seriousness though design and cutting-edge research can be a major component of entire national economies and by not fully supporting the profit motive involved in innovation we may not benefit from the next breakthrough that will change our lives for the better now the big takeaway from all of these examples is that it all goes to show that the black market is there to fill the gaps caused by governments or regulatory bodies saying no you can't buy this or you can buy this but it has to be from this company although the shadow economy leaks in and takes advantages of all market influences even when they are not there to control the product they are there to control the price passionate advocates for legalizing certain markets will always argue that something should be legalized and taxed this will more often than not alleviate a lot of the social issues that come along with these markets but it doesn't mean that it will get rid of them entirely tobacco is one of the most notable examples of this smoking is very bad for you despite this it remains legal in every country around the world apart from bhutan but because of its negative side effects governments will often levy attacks on tobacco products to try and artificially make them less desirable purchases in australia for example a packet of cigarettes that costs about a dollar to produce an import can easily sell over the counter for 40 dollars once government taxes are considered this kind of static price increase means that there is a huge opportunity for people to sell cigarettes that are imported directly into the black market the buyers are getting exactly the same product probably produced in the same factory at a significantly reduced price the sellers get to pocket the difference between the price of international markets and the price in the domestic market or while dealing in a product that is significantly less frowned upon than hard drugs or weapons or kidneys this price intervention also goes the other way when governments say something can't cost more than a certain amount take oil for example when you fill up the price you pay is mostly determined by the price of crude oil government taxes on oil and the markup of the oil retailer let's say for simplicity this is around 1 per liter or 3.80 per gallon for our american friends at this price the demand for oil perfectly matches the supply of oil and the market is said to be in equilibrium but if a government were to turn around and say that expensive oil is hurting our auto industry and trucking companies can't turn a profit with these high oil prices they might introduce what is called a price ceiling a price ceiling means that the price of whatever product it is in this case oil can't go above let's say 50 cents per liter half the price that it was originally trading at if we go back to our demand and supply graph that would look like this nobody can buy or sell oil for more than 50 cents per liter the problem this causes is that almost everybody will want to fill up their cars at 50 cents per liter they will load up on jerry cans and go on road trips and just in all consume or petrol but retailers would not want to sell at this price at 50 cents per liter they might not even be breaking even on production unless they are drilling from nothing but the easiest oil wells so definitely no fracking and definitely no shale oil what this means is that there will be lots and lots of people that go without petrol shown by this quantity shortfall here so what are people to do they still need petrol to get to work or pick up the kids so it's not always a luxury item that they can just go without they would need to buy it from people with less of an attachment to those pesky regulations those people filling up their jerry cans might be a little bit enterprising and agree to sell this fuel back to the general public at a significant markup of course we can chart this out on our graph no matter what oil producers are only going to make this much oil available at 50 cents per liter but this much is demanded this will form a black market price at this level up here say at two dollars a not so fun fact is that this area here represents a dead weight loss that's the cost created to a society born out of market in efficiencies in an attempt to make oil prices more affordable this intervention has made it more expensive for regular consumers oil is an easy example of this but we see these types of price ceilings creating black markets all the time resell supreme brics concert ticket scalpers toilet paper resellers all take advantage of lower mandated prices than what the true market price is so now the different ways that black market form are understood how is it that we study them and why are they so important black markets give the impression they've just been made up of hardened criminals peddling very illegal goods but as we have seen these markets exist wherever there is inefficient market stipulations the logical extent of this is something like a child's lemonade stand chances are this stand is an unlicensed restaurant utilizing child labour in a residential zone so it's part of the underground economy by definition the black market often includes things like this that people think are really benign but all of this can add up to a significant difference in the economy things like unregistered work for cash in hand or goods sold on the side of the road are more often than not unreported to taxation agencies which can have significant impacts on government revenue these industries can also have significant impacts on labor statistics and unemployment rates if governments are trying to conduct robust fiscal and monetary policy they're going to need to know things like the true unemployment rate in reality good economists will actually account for the underground economy in their macroeconomic models now actually quantifying the size of this black market is the hard part if you were to interview your local kidney dealer or lemon beverage proprietor they are going to be less than forthcoming with their financial figures either because they don't know or because that information would expose criminal activities to get around this uncooperative accounting economists use a range of measures from forensic finance to aerial photography and even monitoring the types of consumer goods purchased in an area if a supposedly poor neighborhood is loading up on new cars tvs and jet skis it's pretty safe to assume that there is some form of black market operation going on one of the most inspired ways economists measure the size of the shadow economy is detailed in this article written by friedrich snyder and dominic enst from the journal of economic literature they look at energy output and compare it to gdp figures in reality there is an incredibly strong correlation between gdp and energy output we have actually explored this phenomenon before when we looked at the economy of the star wars galaxy and where it sat on the kardashev scale back on earth if a country or area is using a disproportionate amount of electricity compared with its genuine economic output it's an indication that there is some funny business going on now the reason this is all so important to economists is despite making good models and you know the law and stuff it's that these industries can have major economic impacts illegal labor is one of the most severe examples of this just like our friendly neighbourhood drug dealer from earlier if people are working illegally they don't have any well legal recourse if something goes wrong having a market filled with workers that are happy to work below minimum wage in adverse conditions puts downward pressure on the pay and working conditions of all workers stephen colbert of all people probably said it best in a statement to a congressional hearing if your co-worker can't be exploited then it is less likely that you will be exploited yourself okay so you have seen the doom and gloom human suffering and worst of all broken economic models that come out of the underground economy but you are still keen to dive in and carve out your own little slice of that black market pie now you know how don't go for the obvious stuff these markets are overcrowded over-targeted by authorities and filled to the brim with nasty gangsters instead go and find some market-altering piece of government bureaucracy and work on it instead you will be rewarded for facilitating a free market where supply meets demand taxes are an afterthought and you don't even need to get your hands dirty dealing with stuff that grandma would disapprove of the market for the hearts and minds of politicians is a good one a little bit of money invested here is likely to net you significant returns in the form of lucrative government contracts or accommodating regulations however you do it you are going to want to know how to launder that money and once again economics explained has you covered so go watch our video on money laundering in the modern day the black market the shadow economy or the financial underground whatever you want to call it the collective transactions that fall outside the letter of the law are as important as they are diverse a lot of regular people and economists for that matter will fall into the assumption that the black market is just some fringe reality filled with heisenberg's just as many will fall for the assumption that it's not an important factor to consider when looking at the economic impacts of well anything the black market by its very nature is a non-exact science but by accepting its size and influence we can better steer our legitimate economies tailor market altering policies and if nothing else pocket a bit of cash off those pesky market failures hi guys thanks for watching our latest video if you enjoyed this video please consider liking and subscribing we might be able to explore these slightly more um spicy topics if it weren't for our patrons over on patreon so if you want to see more videos like this one please consider supporting our channel like these awesome people did thanks guys bye

Channel: Economics Explained

Views: 688,644

Keywords: black market economics, criminal economics, the economics of criminal businesses, the economics of the black market, the economics of illegal businesses, underground market economics, black market explained, black market economics explained, what drives the underground economy, what is black market, informal economy, what is black market in economics, what is black marketing, illegal business economics explained, economics explained

Id: wDzZD_YF_Wk

Length: 16min 27sec (987 seconds)

Published: Thu Jul 23 2020