Question

under what circumstances can an illegal market be encouraged exist

Answer 1

Black markets, also called shadow markets, come about when people want to exchange goods or services that are prohibited by governments. Black markets skew economic data, as transactions are unrecorded. Black markets also arise when people don't want to pay taxes on the transaction for legal or illegal goods or services. Some black markets exist simply because people don't realize there are laws they aren't following, such as bartering and not reporting the taxable value of the transaction, or hiring a regular housekeeper or babysitter but failing to pay employment taxes.

Licensure-Driven Black Market Conditions

The licensing restrictions that governments impose on numerous occupations cause some workers to enter the black market because they don't want or can't afford to invest the time and money to obtain the required licenses. For example, in New York City, one must purchase a license called a medallion in order to legally operate a taxi business.2

 These medallions cost hundreds of thousands of dollars, making them prohibitively expensive for most entrepreneurs.3 As a result, some people may choose to operate black-market taxis without a license – at least, until they are caught. Ride-sharing services like Uber or Lyft have further splintered the market for these types of businesses.

Trade-Driven Black Market Conditions

Sometimes participants in black markets don't want to act illegally, but because they lack the ability to work legally and need to make money, they don't report their jobs or income to the government. Such situations arise when illegal immigrants obtain jobs, when students traveling abroad obtain employment without acquiring a work visa or when children work in violation of minimum age requirements.

Regulations-Driven Black Market Conditions

Black markets can also appear when government-imposed price ceilings create shortages. For example, if the government caps the price at which a grocery store may sell bottled water after a natural disaster, the store will quickly run out of water. Vendors will then likely appear selling water at the higher prices people are actually willing to pay. This secondary market is a black market.

Governments can also cause black markets through overregulation. An extreme example can be found in Cuba, where the rationing and ineffective central planning of communism made it difficult to purchase the desired quantities of even basic products such as cooking oil.4 Black markets are rampant because citizens want to buy things that are difficult to come by through legal channels. They're also common because it's so hard to find a job.

Economy-Driven Black Market Conditions

High unemployment can give rise to black markets. When workers can't find jobs in the above-ground economy, they may turn to jobs in the underground economy. These jobs could be as innocuous as fixing a neighbor's toilet (but being paid in cash and not reporting the income to the tax authorities) or as serious as selling cocaine (where not only the sale of the product itself but also the non-reporting of taxable income is illegal).