The literature on the underground economy has avoided a common usage and has instead offered a plethora of appellations including: subterranean; hidden; grey; shadow; informal; clandestine; illegal; unobserved; unreported; unrecorded; second; parallel and black. This profusion of vague labels attests to the confusion of a literature attempting to explore a largely un-chartered area of economic activity. There is no single underground economy, there are many. These underground economies are omnipresent, existing in market oriented as well as in centrally planned nations, be they developed or developing. Those engaged in underground activities circumvent, escape or are excluded from the institutional system of rules, rights, regulations and enforcement penalties that govern formal agents engaged in production and exchange. Different types of underground activities are distinguished according to the particular institutional rules that they violate. Four specific underground economies can be identified: 1. the illegal economy,
2. the unreported economy,
3. the unrecorded economy, and
4. the informal economy.
The "illegal economy" consists of the income produced by those economic activities pursued in violation of legal statutes defining the scope of legitimate forms of commerce. Illegal economy participants engage in the production and distribution of prohibited goods and services. The black market is trade, goods in illegal activities, such as drug trafficking, arms trafficking, and prostitution. The "unreported economy" consists of those economic activities that circumvent or evade the institutionally established fiscal rules as codified in the tax code. A summary measure of the unreported economy is the amount of income that should be reported to the tax authority but is not so reported. A complementary measure of the unreported economy is the "tax gap", namely the difference between the amount of tax revenues due the fiscal authority and the amount of tax revenue actually collected. In the U.S. unreported income is estimated to be $2 trillion resulting in a "tax gap" of $450–$500 billion. The "unrecorded economy" consists of those economic activities that circumvent the institutional rules that define the reporting requirements of government statistical agencies. A summary measure of the unrecorded economy is the amount of unrecorded income, namely the amount of income that should (under existing rules and conventions) be recorded in national accounting systems (e.g. National Income and Product Accounts) but is not recorded. Unrecorded income is a particular problem in transition countries that switched from a socialist accounting system to the western norms of National Income and Product Accounts. New methods have been proposed for estimating the size of the unrecorded (non-observed) economy. But there is still little consensus concerning the size of the unreported economies of transition countries. The "informal economy" comprises those economic activities that circumvent the costs and are excluded from the benefits and rights incorporated in the laws and administrative rules covering property relationships, commercial licensing, labor contracts, torts, financial credit and social security systems. A summary measure of the informal economy is the income generated by economic agents that operate informally.  Pricing
Goods acquired illegally take one of two price levels:
• They may be cheaper than legal market prices. The supplier does not have to pay for production costs or taxes. This is usually the case in the underground economy. Criminals steal goods and sell them below the legal market price, but there is no receipt, guarantee, and so forth. • They may be more expensive than legal market prices. The product is difficult to acquire or produce, dangerous to handle or not easily available legally, if at all. If goods are illegal, such as some drugs, their...
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