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Introduction to Markets - Activity

Markets - legal and illegal!

If you are new to the study of economics, you will have been presented with information detailing what economics is all about - the basic economic problem! One way of solving the economic problem is to allow markets to decide what is going to be produced, how it is going to be produced and who is going to get what is produced. For the most part, this works fairly effectively - after all, most people reading this will have access to the main needs in life... and some! You may have read of 'free market economists' - those who believe that resources are best allocated through the market rather than by a body, such as the government. In reality, markets are not totally free: governments and international organisations interfere with markets for a variety of reasons. Governments also pass laws to ban the production and exchange of some products and services that are felt not to be in our best interests!

The problem, however, is that declaring markets illegal merely pushes them underground. Illegal markets operate very much along the lines of legal markets but because they are illegal, they do not possess some of the characteristics deemed necessary for an efficient market to operate.

Image: The trade in fake Rolexes contributes to the underground market. Copyright: Nick Colomb

Eric Schlosser has written a book about illegal markets in the United States. In the book entitled 'Reefer madness and other tales from the American Underground', Schlosser highlights the extent of the trade in pornography, drugs and illegal immigrants. He cites estimates for the size of the underground market as $650 billion (£409 billion) in 1994! The Gross Domestic Product (GDP) of the UK in 1993 was £514 billion! Schlosser demonstrates the range of activities of underground markets:

'activities range from the commonplace (an electrician demanding payment in cash and failing to declare the payment as income) to the criminal (a gang member selling methamphetamine). They include moonlighting, check kiting* and fencing stolen goods, street vending and tax evading, employing day laborers and child laborers, running sweatshops, smuggling cigarettes, guns, and illegal immigrants, selling fake Rolexes, pirating CDs.'

(Schlosser, E. 2003, p.4 'Reefer Madness and other tales from the American underground' London, Penguin - Allen Lane Publishing)

*check kiting is a fraud that involves using two or more accounts to make multiple withdrawals and deposits using the time delay between the cheques being cleared to make money illegally.

Clearly, the extent of these markets is vast - and they are continuing to grow and flourish. The Internet has helped to improve information flows and it can do it reasonably anonymously. What is clearly at the heart of these flourishing markets is that they are satisfying a want or need, illegal or not!