Underground economy

A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the set of goods and services whose production and distribution is prohibited or restricted by law, non-compliance with the rule constitutes a black-market trade since the transaction itself is illegal. Parties engaging in the production or distribution of prohibited goods and services are members of the illegal economy. Examples include the legal drug trade, prostitution (where prohibited), illegal currency transactions, and human trafficking. Violations of the tax code involving income tax evasion constitute membership in the unreported economy.

Because tax evasion or participation in a black-market activity is illegal, participants attempt to hide their behavior from the government or regulatory authority. Cash is the preferred medium of exchange in illegal transactions since cash transactions are less-easily traced. Common motives for operating in black markets are to trade contraband, avoid taxes and regulations, or skirt price controls or rationing. Typically, the totality of such activity is referred to with the definite article, e.g., "the black market in bush meat".

The black market is distinct from the grey market, in which commodities are distributed through channels that, while legal, are unofficial, unauthorized, or unintended by the original manufacturer, and the white market, in which trade is legal and official.

Black money is the proceeds of an illegal transaction, on which income and other taxes have not been paid, and which can only be legitimised by some form of money laundering. Because of the clandestine nature of the black economy, it is not possible to determine its size and scope.

Unreported business activities and cash transactions occur in most countries and are the continuing subject of investigation by tax authorities. These activities include drug trafficking, gambling, prostitution, loan-sharking, bribery, use of state property for private gain, employment of workers without a permit and without paying social costs and misappropriation of public funds. In 1994 in the UK it was estimated by government tax authorities that the underground economy had reached a volume of £50 billion per year, namely more than twice the annual defence budget.

[Former socialist countries] As its name implies, the second economy refers to all unlawful activities taking place outside the state-controlled economic system. It is centred primarily around the illegal production and distribution of goods and services for private profit. This illegal system has persevered and has even played a useful role in filling the gap resulting from the inefficient performance of the 'first' economy. However, one of its disadvantages is that it has given birth to a new privileged class that enjoys many amenities and luxuries not available to the majority of the population.