How do Black Markets Form?

Fascinating insight from the book Shantaram by David Gregory Roberts who, after escaping from prison, ended up working as a trader in the black market for money in Bombay in the 80s. 

How do black markets form?

Wherever there is high control (regulation) plus high greed (acquisitiveness) then a black market will form. 

Sewage is a highly regulated domain but there’s no demand for shit. On the other hand, many currencies are highly regulated and their usage is controlled. They’re in high demand so there’s a black market. 

He explains:

How is it possible that Roberts can pay 18,000 Rupees for a tourist’s $10,000 when the bank will only pay 15,000 Rupees? Why would he pay more?

The answer is because once he has bought the $10,000 he can also sell them for an even higher price to someone else on the black market who needs to buy those dollars in exchange for their Rupees outside of the control or oversight of the government (eg tax evasion / illegal activities). In this case it’s a win-win-win for all three. The tourist gets more rupees for his dollars, the tax evader can buy a different currency (laundering) and the broker makes a few thousand.