The economics behind black markets: Why have they increased during covid?
Actualizado: may 26
The black market is an economic activity, where goods and services are exchanged illegally or when prohibited by the government. The black market transactions generally occur ‘under the table’ to let participants avoid government price controls or taxes.
With the surge of Covid cases in and around the world, the presence of black markets has increased considerably. One might be tempted to conclude that human life is priceless and a value should not be put to it. Economics, however for the purpose of cost-benefit analysis, considers this as non-sensical. A better way to value human life is to look at the risks that people are voluntarily willing to take for saving their own lives or their loved ones. Thus people going to different means has led some to take advantage of this, making black markets inevitable. This idea is simple and basic and can be understood by even a layman.
But what is the economics behind it? And how does it originate? Let's find out!
The economics behind black markets:
We know that the economy is governed by two laws: Law of supply and demand and the laws enacted by the government. In a free market, where there is no government intervention, demand and supply balance each other and an equilibrium is achieved, where the quantity demanded is equal to the quantity supplied. The price obtained is called the equilibrium price or normal price. The free price system, where price continues adjusting to the market forces of supply and demand is a delicate mechanism, which avoids all kinds of maneuverings that would otherwise appear in society. But the limitation of the free price system, however satisfactory it may be for proper delivery of goods, this mechanism caters to the need of affluent members of the society at the expense of weaker/not so affluent members.
This system expresses itself in accordance with the relative income of the citizens, rather than in accordance with their relative needs and a society characterized by large inequality of income, this proves a serious limitation.
Here, where the government steps in and puts control on price. Price controls are done mainly in two ways- Price Ceiling and Price Floor.
Price Ceiling:- A maximum legislated price set by the government, above which price cannot rise. A price ceiling can be binding and also not binding.
In this figure, the equilibrium point (E) gives equilibrium price and quantity as 3(say in $) and 100 units respectively. The maximum legislated price (Price Ceiling) is above the equilibrium price (here it is $4). So in this case, it has no effect and the market can reach the equilibrium supply and demand.
Binding (figure below): A binding Price Ceiling is when it is below the equilibrium price.
In this figure, the equilibrium price being $3, the binding price ceiling is $2. This binding price ceiling causes the quantity demanded to exceed the quantity supplied. Here, the quantity demanded is 120 units whereas the quantity supplied is 70 units. This creates a shortage in the market henceforth. This shortage of goods does not allow the people to fulfill their demands.
As a result, there is a creation of another market where the goods are sold at a much higher price than the original market price. This leads to the creation of Black Markets, also known as Shadow markets.
Covid and the black market:
Now that we have understood the basic idea about how black markets originate, let us link how it has increased so much during Covid.
Desperate measures to keep their loved ones alive, lack medicines and basic treatment of oxygen therapy, scarce hospital beds have thus made an alarming increase in black markets. It has adapted and shaped itself to the crisis more. In the US and many wealthy countries, illegal drugs, counterfeit medication, and unsanctioned medical supplies are imported through the black market.
India, even with its status as “pharmacy of the world”, the biggest producer of generic drugs has been unable to meet the demand for antiviral medications such as remdesivir and favipiravir. Many hospitals have even flouted rules on price caps, overcharging for personal protective equipment kits, treatment in ICUs and hospital rooms, among others.
Other than the government regulation-driven black market, these types of markets can also arise due to high unemployment, where people can’t find proper jobs and hence find way in an underground economy like this. So, in an economy there can be a lot of factors that account for the same; Price ceiling being the most important and crucial reason.
There are many people, who are in favour of black markets as they can provide legal necessities that are in short supply, as in the case of Cuba. But one must not forget that black markets have a number of downsides like an increase in crimes, violence, thefts, taking business away from law-abiding entrepreneurs, and also puts a heavy tax burden on law-abiding citizens.
The case for the black market is highly subjective and depends on one’s moral and ethical beliefs. The bottom line is, black markets will continue to exist as long as we have regulations. Laws that prevent people from buying and selling what they desire, will always cause people to hide their activities from law enforcement agencies and regulators.
1. Das Gupta, A.K (1950): “The Theory of Black Market Prices”, Economic Weekly, Published: 26th January, 1950.
2. Fontinelle, Amy (2019): “How Black Markets Work”
3. Gregory Mankiw, N (2006), “Principles of Microeconomics, Fourth Edition”