Appl Ex 3b

Application Exercise 3b: Black markets

1) A black market refers to any market involving the sale of illegal goods and/or services.

2) Examples include the sale of prohibited goods (e.g. illicit drugs) or services (e.g. child pornography), the theft and/or sale of someone else’s intellectual property (e.g. downloading films or music from Pirate Bay) and those goods/services sold in the cash economy’ (which attempt to evade the tax system), such as engaging the services of a tradesman and paying cash, where the tradesman neither declares income tax or the receipt of GST.

3) The sale of prohibited goods such as illicit drugs will typically involve a high price because there will be a relatively limited supply of these goods/services on the market given the risks involved. A limited number of goods/services (or a limited number of sellers) will enable those selling the goods to command a higher price (which effectively compensate them for the high risks involved in providing the good or service).

4) The sale of goods and services in those markets where the buyer and/or seller attempted to evade taxes will typically involve the sale occurring at a relatively low price. For example, the higher excise on cigarettes has encouraged the importation of cigarettes from other (low wage and low tax) economies at low prices. These cigarettes are not sold in retail outlets, but instead sold on the black market’.

5) Given that black market activity is an attempt by buyers/sellers to evade government laws related to prohibition and/or tax, the government is keen to avoid black market activity because it undermines the effectiveness of the legal system. For example, the sale of illegal goods such as illicit drugs means that government attempts to protect society from the harmful effects of drugs are proven to be less effective. Similarly, the evasion of tax on transactions in the cash economy means that the government’s revenue base is being eroded, which hinders its ability to fund the host of government programs that are designed to improve our living standards.  The evasion of indirect taxes, such as excise on tobacco, also reduces the effectiveness of government attempts to reduce harmful activity such as smoking.