A black market is when people buy and sell things without informing their government or following their government’s rules. The terms ‘shadow economy’ and ‘underground economy’ mean the same thing: all three phrases are used interchangeably.
People buy from the black market because the good or service they want is difficult or impossible to get hold of legally (because, say, it’s banned in their country) or because they want to save some money (by, say, not paying any tax on it).
If you do some cash-in-hand work and don’t declare it on your tax form, you’re participating in the underground economy. Same if you buy cocaine or cannabis in the UK, whether in-person from a dealer or online from the dark web (an anonymous part of the internet where dodgy stuff often happens).
But you're not taking part in the black market if you sell your old laptop to a mate or buy a second-hand toaster at a car boot sale, even if you don’t tell the government about it. That's because the UK government only requires you to declare and pay tax on the (legal) stuff you sell if it totals more than £12,000 a year.
Because black market transactions fly under the official radar, they can make make it difficult for economists to figure out what a place’s economy really looks like. They’re often not included in GDP, which is the sum of all the goods and services a country produces each year. That can make an economy seem smaller than it really is. Or what looks like a high unemployment rate could really just be lots of people working secretly in the shadow economy.
Black markets are theoretically examples of free markets, because transactions are influenced by supply and demand without any government interference. However, their illegality can be a big barrier to entry for sellers. Selling some black market products means risking a lengthy jail sentence and/or a turf war with an established criminal network.
The end result is that some black markets end up as monopolies (dominated by one seller) or oligopolies (dominated by a few sellers). The fewer sellers - aka the less competition - there is in any market, the higher prices tend to be (since buyers have little choice about who they buy from).
Black markets are often seen as bad things. By not paying tax, they shortchange governments who then have less money to spend on public goods like education or healthcare. They are often linked to crime, and bring stuff into a country that many people consider dangerous or immoral.
But many generally law-abiding people find the underground economy helpful and even necessary, particularly if their governments are incompetent, autocratic or corrupt. For example, for the last few years in Venezuela the government has heavily restricted the amount of food, money and other necessities available in its official shops. So desperate, hungry people have turned to the black market (and paid much higher prices) in order to meet their needs.
Even in democratic countries like the UK, plenty of people are comfortable with at least some form of black market. For example, just under half (44 percent) of Brits say it’s okay for small traders, such as plumbers and cleaners, to hide some of their earnings in order to reduce their tax bill, usually by working for ‘cash in hand’.