Forbidden market

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Definition

A forbidden market is a market involving the trade of a certain type of good or service that is forbidden by legal or regulatory fiat by a government. Forbidden markets could be of two kinds:

  • The good or service being exchanged, or the activity involved, is itself forbidden. Examples include drugs that are illegal in many countries.
  • Exchanging the good or service for money, or for the equivalent of money, is forbidden, even though the activity itself is legal. Examples include prostitution and the organ trade. One way of formulating this is that a price ceiling of zero is placed on the good or service.

Forbidden markets are related to missing markets. The term missing market is used for a market that does not exist, but the non-existence of the market may not be due to regulatory obstructions. It may be due to the high transaction costs for buyers and sellers to meet and agree to deal.

Rationales for forbidden markets

Some common rationales offered are:

  • External costs: The activity (and/or the involvement of money in the activity) imposes costs, or violates the rights, of parties not involved in it.
  • Paternalism: The activity (and/or the importance of money in the activity) harms the parties engaging in it, and this harm is sufficient to override the presumption of freedom they have to do what they want.
  • Repugnance or moral wrongness: The activity (and/or the involvement of money in the activity) is morally wrong or repugnant. While this may partially overlap with the other reasons, it is sometimes claimed that certain actions are wrong and should be illegal even if they do not impose external costs or hurt the parties themselves.