Black markets exist when the state places restrictions on the production or provision of goods and services that come into conflict with market demands. These markets prosper, then, when state restrictions are heavy, such as during prohibition or rationing. However, black markets are normally present in any given economy; where there are laws, someone will break them.
Black market priceAs a direct result of an increase in government restrictions, black market prices for the relevant products will rise, as said restrictions represent a decrease in supply. According to the theory of supply and demand, a decrease in supply -- making the product more scarce -- will increase prices, other things being equal. Similarly, increased enforcement of restrictions will increase prices for the same reason.
Goods acquired illegally can take one of two price levels; they may be less expensive than (legal) market prices, because the supplier did not incur the normal costs of production. Alternatively, illegally supplied products may be more expensive than normal prices, because the product in question is difficult to acquire, and may not be available legally.
In the former case, however, most people are likely to continue to purchase the products in question from legal suppliers, for a number of reasons:
- The consumer may feel that the black market supplier conducts business immorally (although this criticism can extend to legal suppliers too);
- The consumer may -- justifiably -- trust legal suppliers more, as they are both easier to contact in case of faults in the product and easier to hold accountable;
- In some countries, it is a criminal offence to handle stolen goods, a factor which will discourage buyers.
Examples of black marketsThe Prohibition period in the United States is a classic example of black market activity, when organised crime groups took advantage of the lucrative opportunities in the resulting black market in banned alcohol production and sales.
Similarly since prostitution is illegal in many places, a black market develops.
Compare: informal economy