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Black Market Economics - What Drives the Underground Economy? - YouTube
Channel: Economics Explained
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the underground economy is one of the
[2]
largest and most influential markets in
[4]
the world
[5]
the sale of everything outside of the
[7]
law is by its very nature
[9]
hard to track but reputable sources peg
[12]
at that well
[13]
into the trillions of dollars per year
[15]
that's bigger than the market for fast
[17]
food
[18]
movies fashion and smartphones combined
[22]
many times over this is something that
[25]
can genuinely impact
[26]
entire nations not only do black market
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activities come with a significant human
[31]
cost
[32]
but the economic forces involved can
[34]
easily make the difference between a
[36]
successful economy
[37]
and a struggling economy we have seen
[40]
the positive and negative impacts that
[41]
oil and gas discoveries can have on
[43]
national economies
[45]
but black market revenues in 2019
[48]
rivaled these revenues worldwide so it's
[51]
not
[51]
unreasonable to assume that the impacts
[54]
would be just
[55]
as great to truly explore these
[57]
industries though
[58]
we as always have to understand what
[60]
makes the black market function
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so what is the black market and spoiler
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alert it's a lot more than just selling
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drugs
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why is it so large and influential what
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are the best ways to practically combat
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these illicit trades
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and if you were so inclined how would
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one
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carve out a little bit of black market
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profit all of their own
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this episode of economics explain was
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made possible by our fans on patreon
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because let's be honest this one is
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definitely getting demonetized
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this has been one of the most requested
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videos amongst our patron team
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if you would like to have your say about
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even if it is a video like this one
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please consider supporting the channel
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on patreon.com
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economics explained when someone thinks
[106]
of the black market their mind will
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immediately race too
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mafia bosses running protection rackets
[112]
or pablo escobar with his mountains of
[114]
ill-gotten gains
[115]
now these are certainly parts of the
[117]
black market but they do not define it
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in reality the black market is the
[123]
result
[124]
of regulatory rigidities
[127]
controlled substances guns ill-gotten
[130]
kidneys
[131]
and fake passports are all illegal to
[134]
own
[134]
illegal to buy and illegal to sell
[137]
this is a very direct way that a
[140]
government can control
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a consumer market any type of
[144]
transaction involving these items
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is not sanctioned and the punishments
[148]
are pretty severe for trying to
[150]
accommodate these sales
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this means three things one
[155]
that these transactions cannot be
[157]
legally recognized
[159]
you can't pay taxes on them and you will
[161]
most likely need to launder any money
[162]
you make from them
[164]
two the parties involved will have to
[166]
accept a cost
[167]
premium due to the risks involved in not
[170]
having enforceable contracts
[172]
meaning that if someone does you are
[173]
dirty in one of these deals it's up to
[175]
you to seek compensation
[177]
because well obviously you can't go and
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do it through a court
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this can be risky and expensive
[184]
and three the parties involved will have
[186]
to accept a cost
[187]
premium due to the inherent risk reward
[190]
trade-off of dealing with items that
[191]
could get you
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25 years to life so the black market for
[195]
outright illegal goods is filled with
[197]
costly items sold by people with the
[199]
means to defend themselves and are not
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necessarily afraid of prison right
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well yes but the black market is not
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entirely made up of these types of very
[210]
obviously illegal items one of the
[212]
largest underground markets in the world
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is for counterfeit goods in 2016
[218]
this market rivaled the size of the drug
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trade now counterfeit goods are still
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illegal
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but for different reasons nobody's gonna
[228]
od on fake yeezys and you can't haze
[231]
someone with a fake
[232]
rolex so they are inherently less
[234]
dangerous to have in circulation
[237]
but they defy intellectual property
[240]
rights
[240]
when a company designs a shoe or a watch
[243]
or even makes a video to put onto the
[245]
internet
[246]
they have the right to exclusively share
[248]
that
[249]
intellectual property because of this
[251]
exclusivity
[252]
they are often able to charge a premium
[254]
for their funny shoes
[255]
plain looking watches or australian
[257]
sounding economics commentary
[259]
this premium allows designers innovators
[262]
and content creators
[264]
to profit off the time and effort they
[266]
spent developing the product
[267]
that they are bringing to market this
[270]
premium also means that it's very
[272]
easy for a copycat to come in and
[274]
replicate the product without having to
[276]
invest into the development
[277]
and undercut the innovator oftentimes
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counterfeit goods are of extremely
[283]
inferior quality
[284]
but other times they are
[286]
indistinguishable authorities from
[288]
around the world are very keen to crack
[290]
down on this market
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because undercutting genuine innovation
[293]
means that one
[294]
there is no profit incentive to invest
[296]
into research and development
[298]
and two the businesses that are
[300]
innovating will be priced out
[302]
so they won't be able to continue
[305]
innovating
[306]
this is often seen as a pretty benign
[308]
market given that the only victims are
[310]
high-priced fashion houses media studios
[313]
and
[313]
poor poor youtubers but
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in all seriousness though design and
[319]
cutting-edge research can be
[321]
a major component of entire national
[323]
economies
[324]
and by not fully supporting the profit
[326]
motive involved in innovation
[328]
we may not benefit from the next
[330]
breakthrough that will change our lives
[332]
for the better now the big takeaway from
[335]
all of these examples is that it all
[337]
goes to show
[338]
that the black market is there to fill
[340]
the gaps
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caused by governments or regulatory
[343]
bodies saying
[344]
no you can't buy this or you can buy
[346]
this
[347]
but it has to be from this company
[349]
although
[350]
the shadow economy leaks in and takes
[352]
advantages of
[353]
all market influences even when they are
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not there to control the product
[358]
they are there to control the price
[361]
passionate advocates for legalizing
[363]
certain markets will always
[364]
argue that something should be legalized
[367]
and taxed
[368]
this will more often than not alleviate
[370]
a lot of the social issues that come
[372]
along with
[372]
these markets but it doesn't mean that
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it will get rid of them
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entirely tobacco is one of the most
[379]
notable examples of this smoking
[382]
is very bad for you despite this it
[385]
remains legal
[386]
in every country around the world apart
[388]
from bhutan
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but because of its negative side effects
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governments will often levy attacks on
[394]
tobacco products to try and artificially
[396]
make them less desirable purchases
[398]
in australia for example a packet of
[401]
cigarettes that costs about a dollar to
[402]
produce an import
[404]
can easily sell over the counter for 40
[407]
dollars
[408]
once government taxes are considered
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this kind of static price increase means
[412]
that there is a
[413]
huge opportunity for people to sell
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cigarettes that are imported directly
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into the black market the buyers are
[420]
getting exactly the same product
[422]
probably produced in the same factory at
[424]
a significantly reduced price
[426]
the sellers get to pocket the difference
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between the price of international
[430]
markets
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and the price in the domestic market or
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while dealing in a product that is
[434]
significantly less frowned upon
[436]
than hard drugs or weapons or
[439]
kidneys this price intervention also
[442]
goes the other way
[443]
when governments say something can't
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cost more than a certain amount
[448]
take oil for example when you fill up
[450]
the price you pay
[452]
is mostly determined by the price of
[454]
crude oil government taxes on oil
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and the markup of the oil retailer let's
[459]
say for simplicity this is around
[461]
1 per liter or 3.80 per gallon for our
[465]
american friends
[466]
at this price the demand for oil
[469]
perfectly matches the supply of oil
[471]
and the market is said to be in
[473]
equilibrium
[475]
but if a government were to turn around
[477]
and say that
[478]
expensive oil is hurting our auto
[480]
industry and trucking companies can't
[482]
turn a profit with these high oil prices
[484]
they might introduce what is called a
[486]
price ceiling
[488]
a price ceiling means that the price of
[489]
whatever product it is
[491]
in this case oil can't go above let's
[493]
say
[494]
50 cents per liter half the price that
[497]
it was originally trading at
[499]
if we go back to our demand and supply
[501]
graph that would look like this
[503]
nobody can buy or sell oil
[506]
for more than 50 cents per liter the
[509]
problem this causes
[510]
is that almost everybody will want to
[512]
fill up their cars at 50 cents per liter
[515]
they will load up on jerry cans and go
[517]
on road trips and just in all
[519]
consume or petrol but retailers would
[522]
not want to sell at this price
[524]
at 50 cents per liter they might not
[527]
even be breaking
[528]
even on production unless they are
[530]
drilling from nothing but the easiest
[532]
oil wells
[533]
so definitely no fracking and definitely
[535]
no shale oil
[537]
what this means is that there will be
[539]
lots and lots of people that go
[541]
without petrol shown by this quantity
[544]
shortfall
[544]
here so what are people to do
[548]
they still need petrol to get to work or
[550]
pick up the kids so
[552]
it's not always a luxury item that they
[553]
can just go without
[555]
they would need to buy it from people
[557]
with less of an attachment to those
[559]
pesky regulations
[561]
those people filling up their jerry cans
[563]
might be a little bit enterprising and
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agree to sell this fuel back to the
[566]
general public
[567]
at a significant markup of course we can
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chart this out on our graph
[573]
no matter what oil producers are only
[575]
going to make this much oil available at
[577]
50 cents per liter
[579]
but this much is demanded
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this will form a black market price at
[585]
this
[586]
level up here say at two dollars
[589]
a not so fun fact is that this area here
[592]
represents a dead weight loss that's the
[596]
cost created to a society
[598]
born out of market in efficiencies in an
[601]
attempt to make oil prices more
[602]
affordable
[603]
this intervention has made it more
[605]
expensive for regular consumers
[608]
oil is an easy example of this but we
[611]
see these types of price ceilings
[612]
creating black markets
[614]
all the time resell supreme brics
[618]
concert ticket scalpers toilet paper
[620]
resellers
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all take advantage of lower mandated
[623]
prices
[624]
than what the true market price is so
[627]
now
[628]
the different ways that black market
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form are understood
[631]
how is it that we study them and why are
[634]
they so
[635]
important black markets give the
[638]
impression they've just been made up of
[639]
hardened criminals peddling
[641]
very illegal goods but as we have seen
[644]
these markets exist wherever there is
[647]
inefficient market stipulations
[649]
the logical extent of this is something
[651]
like a child's lemonade stand
[653]
chances are this stand is an unlicensed
[656]
restaurant
[657]
utilizing child labour in a residential
[660]
zone
[660]
so it's part of the underground economy
[663]
by definition
[664]
the black market often includes things
[666]
like this that people think
[668]
are really benign but all of this can
[670]
add up to a significant difference in
[673]
the economy
[674]
things like unregistered work for cash
[676]
in hand or
[677]
goods sold on the side of the road are
[679]
more often than not
[680]
unreported to taxation agencies which
[682]
can have significant
[684]
impacts on government revenue these
[686]
industries can
[687]
also have significant impacts on labor
[689]
statistics and unemployment rates
[691]
if governments are trying to conduct
[693]
robust fiscal and monetary policy
[696]
they're going to need to know things
[697]
like the true unemployment rate
[699]
in reality good economists will actually
[702]
account for the underground economy in
[703]
their macroeconomic models
[705]
now actually quantifying the size of
[707]
this black market
[708]
is the hard part if you were to
[711]
interview your local kidney dealer or
[713]
lemon beverage proprietor they are going
[716]
to be less than forthcoming with their
[717]
financial figures
[719]
either because they don't know or
[721]
because that information would expose
[723]
criminal activities to get around this
[726]
uncooperative accounting
[728]
economists use a range of measures from
[730]
forensic finance to
[731]
aerial photography and even monitoring
[734]
the types of consumer goods purchased in
[736]
an area
[737]
if a supposedly poor neighborhood is
[739]
loading up on
[740]
new cars tvs and jet skis it's pretty
[744]
safe to assume that there is some form
[746]
of black market operation going on
[748]
one of the most inspired ways economists
[750]
measure the size of the shadow economy
[753]
is detailed in this article written by
[755]
friedrich snyder
[756]
and dominic enst from the journal of
[758]
economic literature
[760]
they look at energy output and compare
[762]
it to gdp
[763]
figures in reality there is an
[766]
incredibly strong correlation between
[768]
gdp
[769]
and energy output we have actually
[771]
explored this phenomenon before
[773]
when we looked at the economy of the
[775]
star wars galaxy
[776]
and where it sat on the kardashev scale
[779]
back on earth
[780]
if a country or area is using a
[783]
disproportionate amount of electricity
[785]
compared with its genuine economic
[787]
output
[787]
it's an indication that there is some
[790]
funny business going on
[792]
now the reason this is all so important
[794]
to economists is despite making good
[796]
models and
[796]
you know the law and stuff it's that
[800]
these industries can have
[801]
major economic impacts illegal labor is
[804]
one of the most severe examples of this
[807]
just like our friendly neighbourhood
[808]
drug dealer from earlier
[810]
if people are working illegally they
[813]
don't have any well
[814]
legal recourse if something goes wrong
[818]
having a market filled with workers that
[820]
are happy to work
[821]
below minimum wage in adverse conditions
[824]
puts downward pressure on the pay and
[826]
working conditions
[827]
of all workers stephen colbert of all
[830]
people
[830]
probably said it best in a statement to
[832]
a congressional hearing
[834]
if your co-worker can't be exploited
[836]
then it is less likely
[838]
that you will be exploited yourself
[844]
okay so you have seen the doom and gloom
[848]
human suffering and worst of all broken
[850]
economic models that come out of the
[852]
underground economy
[853]
but you are still keen to dive in and
[855]
carve out your own little slice of that
[857]
black market pie
[859]
now you know how don't go for the
[863]
obvious stuff
[864]
these markets are overcrowded
[866]
over-targeted by authorities
[868]
and filled to the brim with nasty
[870]
gangsters
[871]
instead go and find some market-altering
[874]
piece of government bureaucracy
[876]
and work on it instead you will be
[878]
rewarded for facilitating a
[880]
free market where supply meets demand
[883]
taxes are an afterthought and you don't
[885]
even need to get your hands dirty
[887]
dealing with stuff that grandma would
[889]
disapprove of
[890]
the market for the hearts and minds of
[892]
politicians is a good one a little bit
[894]
of money invested here
[895]
is likely to net you significant returns
[897]
in the form of
[898]
lucrative government contracts or
[900]
accommodating regulations
[902]
however you do it you are going to want
[904]
to know how to launder that money
[906]
and once again economics explained has
[908]
you covered so go watch our video on
[911]
money laundering
[912]
in the modern day
[916]
the black market the shadow economy or
[919]
the financial underground
[921]
whatever you want to call it the
[922]
collective transactions that fall
[924]
outside the letter of the law are as
[926]
important as they are
[927]
diverse a lot of regular people and
[930]
economists for that matter will fall
[932]
into the assumption that the black
[933]
market
[934]
is just some fringe reality filled with
[937]
heisenberg's just as many will fall for
[940]
the assumption that it's
[941]
not an important factor to consider when
[943]
looking at the economic impacts of
[945]
well anything the black market by its
[948]
very nature
[949]
is a non-exact science but by accepting
[952]
its size and influence we can better
[955]
steer our legitimate economies
[957]
tailor market altering policies and if
[959]
nothing else
[960]
pocket a bit of cash off those pesky
[962]
market failures
[967]
hi guys thanks for watching our latest
[968]
video if you enjoyed this video please
[970]
consider liking and subscribing
[972]
we might be able to explore these
[974]
slightly more um
[976]
spicy topics if it weren't for our
[978]
patrons over
[979]
on patreon so if you want to see more
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videos like this one
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please consider supporting our channel
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like these awesome people did
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thanks guys bye
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