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The underground economy, shadow economy, black economy, parallel economy, or black market consists of all commerce on which applicable taxes are being evaded. The market includes not only legally-prohibited commerce (for example, drugs, prostitution, guns and gambling activities that are illegal in some locales), but also trade in legal goods and services because some income is not reported and consequently taxation is evaded, e.g., through money laundering, or payment in cash, which is almost untraceable.

The underground economy also includes transactions that governments may allow to be free of taxation, either by legal sanction or by simply choosing to refrain from enforcement of tax laws in certain markets. The term underground economy typically is not used to refer to trade in stolen goods, which is also given the name “black market”.

Underground economy transactions are typically cash transactions to evade traceability by governments or complex financial operations involving the use of multiple subsidiaries and tax havens.

The Clearstream scandal is an example of such tax evasion. Based in Luxembourg, Clearstream practices financial clearing, which means it centralizes operations of multiple banks, some based in tax havens.

Measurement of the size of the underground economy is subject to a large margin of error. Economists seeking to measure its size have often looked at the volume of cash in circulation, although a large part of the underground economy takes place via bank accounts located in tax havens. Discrepancies between the growth of officially reported spending (GDP) and the growth of cash in circulation may be used to infer growth in the size of the underground economy, but these estimates are subject to a considerable amount of judgement, and are controversial.

The growth of online commerce may have increased the size of the underground economy. eBay has over 40 million regular users, including international users. The sellers are legally responsible to pay taxes^[1]. However, there is no report on how many actually do, and governments rarely, if ever, intervene to ensure they do.

The underground economy, when trading decisions are not the result of coercion, is arguably a free market, since, by definition, it lacks government intervention. However, various governments have engaged themselves in the underground economy, thus blurring the line between public intervention and its absence.

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 or pay the usual taxes. This is usually the case in the underground market for stolen goods.

Alternatively, illegally supplied goods may be more expensive than normal prices, because the product in question is difficult to acquire or produce, dangerous to deal with, or may hardly be available legally. This is usually the case in the underground market for goods that are illegal to possess.

Even when the underground market offers lower prices, however, many people are likely to continue to purchase the goods in question from legal suppliers, for a number of reasons:

• Some consumers may feel that the black market supplier conducts business immorally (although this criticism sometimes extends 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 offense to handle stolen goods, a factor which will discourage buyers.
• Consumers may feel (legitimately or not) that they incur a physical risk to their person when dealing with black market goods, depending on the goods and how they are acquired.

In the latter case of an underground market for goods which are simply unavailable through legal channels, underground markets will thrive if consumer demand nonetheless continues. In the case of the legal prohibition of a product viewed by large segments of the society as harmless, such as alcohol under prohibition in the United States, the black market will prosper, and the black marketeers often reinvest profits in a widely diversified array of legal or illegal activity well beyond the original item. Underground markets can be reduced or eliminated by removing the relevant legal restrictions, thereby increasing the supply and quality of formerly banned goods. People who advocate this may believe that governments should recognize fewer crimes in order to focus law enforcement effort on the most treatable dangers to society. However, this can be seen by some people as the equivalent of legalizing crime in order to reduce the number of “official” criminal delicts — in other words, an immoral concession that in their view only makes matters worse. Removing legal restrictions will usually reduce the price of the goods in question, resulting in more of them being bought and sold. For example, if illicit drugs were to be legalized, their price would drop and many would likely abandon their black market sources in favor of their more trustworthy legal sources. However, this particular example could be viewed as beneficial for society - instead of consumers being forced to use black market sources (thereby providing those sources with funding for other, more harmful, activities, as well as exposing themselves to the risks of an uncontrolled and unregulated drug supply), drugs could be regulated and taxed, reducing harm caused by low quality/contaminated drugs, and providing a huge source of revenue for the state.

Contents 1 Examples of black markets 1.1 Wars 1.2 Prohibition in the United States 1.2.1 Of alcohol 1.2.2 Of smoking 1.3 Illegal drugs 1.4 Prostitution 1.5 Firearms 1.6 Alcohol and tobacco 1.7 Copyrighted media 2 References 3 See also 4 External links

Black markets flourish in most countries during wartime. Most states engaged in total war or other large-scale, extended wars must necessarily impose restrictions on domestic use of critical resources which are needed for the war effort, such as food, gasoline, rubber, metal, etc., typically through rationing. In most (or perhaps all) cases, a black market develops to supply rationed goods at exorbitant prices. The rationing and price controls enforced in many countries during World War II encouraged widespread black market activity (see Wide boy).

Prohibition period in the early twentieth century in the United States is a classic example of the creation of a black market, its activity while the affected good has to be acquired on the black market, and its end. Many organized crime groups took advantage of the lucrative opportunities in the resulting black market in banned alcohol production and sales. Since much of the populace did not view drinking alcohol as a particularly harmful activity (that is, consumers and its traders shouldn’t be treated like conventional criminals), illegal speakeasies prospered, and organizations such as the Mafia grew tremendously more powerful through their black market activities distributing alcohol.

This effect similarly is seen today, when jurisdictions pass bans on smoking in bars and restaurants. In such jurisdictions, smokeasies (businesses, especially barrooms, which allows smoking despite the legal prohibition) frequently arise. This phenomenon is very prevalent in many jurisdictions with smoking bans, including California^[2][3], Philadelphia^[4][5], Dublin^[6], Utah^[7], Seattle^[8], Scotland^[6][9], Ohio^[10], and Washington, D.C..^[11]

Main article: Illegal drug trade

Beginning in the 19th and 20th centuries, many countries began to ban the possession or use of various recreational drugs, such as the United States’ famous “war on drugs.” Many people nonetheless continue to use illegal drugs, and a black market exists to supply them. Despite ongoing law enforcement efforts to intercept illegal drug supplies, demand remains high, providing a large profit motive for organized criminal groups to ensure that drugs are available. The United Nations has reported that the retail market value of illegal drugs is worth 321.6 billion dollars. [1] While law enforcement efforts do capture a small percentage of the distributors of illegal drugs, the high and very inflexible demand for such drugs ensures that black market prices will simply rise in response to the decrease in supply—encouraging new distributors to enter the market in a perpetual cycle. Many drug legalization activists draw parallels between the United States’ experience with alcohol Prohibition and the current bans on various psychoactive drugs.

Prostitution is illegal in many nations and regions throughout the world. However, as market demand for the illegal services of prostitutes remains high, black markets are usually found catering to such demands. Prostitutes in such areas generally operate with some degree of secrecy, sometimes negotiating price and activities through codewords and subtle gesture. Additionally, in areas such as the Netherlands where prostitution is legal but carefully regulated, illegal prostitutes exist whose services are offered without regard for legal requirements or procedures. In Costa Rica legal prostitution is regulated and most upscale hotels require identification of both parties involved to help prevent the growing percentage of child prostitution.

In certain countries firearms remain illegal to own and/or use by civilians and even police officers. So, many people who want one of these items must buy them illegally through Black market channels.

However, in some countries firearms are legal, although a specific license may be required to own them. So, if the right license can not be obtained for any reason, people will go into the black market to obtain their desired items.

The black market firearms trade remains high due to the high demand by gang culture and collectors, etc.

Black markets can also form near when neighboring jurisdictions with loose or no border controls have substantially different tax rates on similar products. Products that are commonly smuggled to fuel these black markets include alcohol and tobacco.

It has been reported that smuggling one truckload of cigarettes from a low-tax U.S. state to those jurisdictions of the same country with the highest taxes can lead to a profit of up to $2 million. [2] The low-tax states are generally the major tobacco producers and have come under enormous criticism for their reluctance to increase taxes from their minimal rates. North Carolina eventually agreed to raise its taxes from 5 cents per pack to 35 cents, although this remains far below the national average. [3] However, South Carolina has thus far refused to follow suit and raise their taxes from seven cents per pack (currently the lowest in the U.S.A.) [4] Some law enforcement officials have expressed concern that the profits from tobacco smuggling may be directed to terrorist organizations. This has led to calls for the U.S. Congress to intervene by setting mandatory minimum tobacco taxes for all states.

Street vendors in many areas, particularly in countries with loose enforcement of copyright law, often sell deeply discounted copies of movies, music CDs, and computer software such as video games, sometimes long before the official release of a title. Innovations in consumer DVD and CD burners and the widespread availability on the Internet of cracks for most extant forms of copy protection technology allow anyone with a few hundred dollars to produce DVD and CD copies that are digitally identical to an original and suffer no loss in quality.

Such operations have proven very difficult for copyright holders to combat legally, due to their decentralized nature and the cheap widespread availability of the equipment needed to produce illegal copies for sale. Widespread indifference towards the enforcement of copyright law on the part of law enforcement officials outside of First World countries further compounds the issue there.

• Agorism
• Counter-economics
• Informal economy
• Grey market
• Business ethics
• Wide boy
• Household electricity approach

• Shadoweconomy.eu Publications and research on the shadow economy and tax evasion
• Official March 2000 French Parliamentary Report on the obstacles on the control and repression of financial criminal activity and of money-laundering in Europe by French MPs Vincent Peillon and Arnaud Montebourg, third section on “Luxembourg’s political dependency toward the financial sector: the Clearstream affair” (pp.83-111 on PDF version)
• The Underground Economy from National Center for Policy Analysis (1998)
• Going Underground: America’s Shadow Economy by Jim McTague (2005)
• The Underground Economy: Global Evidence of Its Size and Impact (1997)
• The Effects of a Black Market Using Supply and Demand
• Information on Black Market products
• Cold War Black Market Secrets