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Black Markets

Black Markets. From Lecture Notes Lesson #3. Black Markets. Also called Shadow economy Hidden economy  Government price controls, regulations, and taxes can lead to black markets. Black Markets. Black Market - market that operate outside the legal system. Reasons

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Black Markets

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  1. Black Markets From Lecture Notes Lesson #3

  2. Black Markets • Also called • Shadow economy • Hidden economy  • Government price controls, regulations, and taxes can lead to black markets

  3. Black Markets • Black Market - market that operate outside the legal system. • Reasons 1. Illegal products and services. • Drugs, prostitution, gambling, smuggling, etc.

  4. Black Markets • Reasons 2. Avoid high taxes • Barter - one person trades a good or service with another • No money is exchanged • No taxes • Person or business under reports income and assets, or over states debt • Claiming children on U.S. federal tax forms, lowers taxes; • Some people claimed their animals as children

  5. Black Markets • Reasons 3. Circumvent price controls. 4. Avoid costly regulations. • Labor markets are highly regulated in many countries • Many U.S. employers hire foreigners (from Mexico) that do not have proper documents to work legally in U.S. • Employers pay lower wages

  6. Black Markets • Reason 5. Decline of civic loyalty to government • People start to lose respect for their government institutions • Wide spread political corruption

  7. Black Markets • Black markets have: • More defective products. • Higher profits. • Higher risk: • Arrests. • Court fines and fees. • Jail or prison sentence. • Greater violence from enforcing contracts.

  8. Problems of Black Markets • Problems if there is a sizable shadow economy • Decreases the tax base and tax collections • Leads to higher tax rates • Government invests less in infrastructure, like roads, bridges, etc. • Government statistics are inaccurate • Unemployment is higher than should be

  9. Size of Hidden Economy

  10. Measuring Black Markets • People in black markets will not honestly disclose their activities • How could you measure the size of a hidden economy?

  11. Conclusion • Decrease size of black markets and lower gov. corruption • Removing price controls • Lowering tax rates • Reducing regulations • Fostering competition • This interesting fact is the shadow economy appears to be growing in many countries including the U.S.

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