Forbidden Transactions and Black Markets

Abstract

Repugnant transactions are sometimes banned, but legal bans sometimes give rise to active black markets that are difficult if not impossible to extinguish. We explore a model in which the probability of extinguishing a black market depends on the extent to which its transactions are regarded as repugnant as measured by the proportion of the population that disapproves of them and the intensity of that repugnance as measured by willingness to punish. Sufficiently repugnant markets can be extinguished with even mild punishments, whereas others are insufficiently repugnant for this and become exponentially more difficult to extinguish the larger they become and the longer they survive.