The black market is not a physical place, but rather an economic activity in which merchandise and/or services are bought and sold illegally. Also called the “underground market,” the black market gets its name due to the fact that its activity is conducted out of sight and often “in the dark,” outside the sight of law enforcement. The black market can be illustrated by something as innocent and innocuous as selling gum on the playground, or by something as serious as the sale of smuggled weapons or drugs.

Many factors can make a transaction illegal, thus qualifying it as a black market transaction. The good or service itself may be illegal, such as illicit drugs, weapons, or prostitution. One prime example of a black market created because of an illegal product was the result of prohibition. After alcohol was outlawed in the U.S. in 1919, it was smuggled into the country and sold at speakeasies and private bars. The result was an era of organized crime and an estimated 500 million US dollars (USD) in lost tax revenues annually.

An example of an illegal service sold on the black market is prostitution. Outlawing the prostitution of women and children throughout most of the world has created a huge illicit sex trade. Countries where this type of black market flourishes are a destination spot for those seeking to pursue this activity.

In other cases, goods may be stolen and then re-sold on the black market. When a good is euphemistically referred to as having “fallen off the back of a truck,” usually it means that it has been stolen for the purpose of being sold on the black market. If you are purchasing a new stereo, for example, from an individual at an extremely low price, there’s a good chance that it’s been stolen. Another way that a transaction can be illegal is if it is an otherwise legal good or service that is bought or sold in such a way as to avoid proper licensing or taxes. This is the case with unregistered firearms and cigarettes, which usually include a hefty local, state, or federal tax.

Due to man’s inherently entrepreneurial nature, coupled with government’s pesky tendency to regulate, black markets can and do exist everywhere. They do, however, tend to develop more readily in states or countries with especially heavy regulation. Even though a good or service becomes outlawed or heavily regulated, the market may continue to demand it. As a result, the black market springs up to meet the market’s demand. This is the case when governments place price controls, rationing or complete prohibition on a good or service.

During wartime, black markets tend to thrive due to rationing or short supply. During World War II, many countries had a hard time importing basic goods to meet demand, thereby driving up prices on the black market. Eastern Europe and the former Soviet Union had and most likely still have a healthy black market.

Although the consumer’s demand is met, usually the seller or “black marketeer” is the one who profits from a black market transaction. Black market prices tend to be higher due to smaller supply and constant demand. The risk that a black marketeer takes in acquiring and selling a good or service is also included in the price. If it is a difficult good to acquire, it will have a higher price as well. At times, prices can be lower if the seller has lower “overhead” because he or she stole the good or is avoiding high taxes.

Consumers are often willing to overlook the illegality of a black market transaction if they feel that the good or service is “harmless.” This is often the case with illegal prostitution and also applied to alcohol sales during prohibition. Although some people think that most black market transactions are relatively harmless, the money generated on the black market is often used for nefarious purposes. The mafia in the U.S. thrived during prohibition, resulting in bloody battles over turf and profits. Governments combating black markets spend vast fortunes fighting organized crime and racketeering, and lose millions in tax revenues from the prohibited good.

Many solutions to the black market have been proposed, including deregulation, legalizing drugs and prostitution, and increasing supply of a particular black market good. Some argue that this is a concession to criminals and drug users, while others argue that government resources can be put to better use.