A black market involves the sale of goods and services in an illegal, uncontrolled and unregulated manner. Black markets typically arise when the government attempts to control prices or imposes an excessively high tax burden on transactions. For example, when a government imposes price controls on fuel, individuals willing to pay more than the fixed rate will form the demand side of a black market. Anyone willing to supply them with the fuel at a higher price point forms the supply side of the market. Similarly, when the government imposes a high tax surcharge on cigarettes, it is quite likely that there will be a thriving black market in which cigarettes are traded at a much lower price, but without the tax. Another example of a black market is in currency trading, which arises when a government locks in the exchange rate at which its currency can be converted to other currencies.
Black market transactions are always illegal, so governments typically have enforcement divisions that seek out black market transactions and penalize those engaged in them. A country can suffer when the black market component of its economy is large, since the government is unable to glean any tax revenue from it; the result can be very low levels of public service. Also, it is impossible to measure the true size of the economy, since so much of it is not being reported.
There are a number of downsides to black markets, including the following:
Participants have no legally-enforceable rights against each other.
Organized crime may be involved.
A buyer may be saddled with substandard goods or services.
A black market is also known as the shadow economy or the underground economy.