Government regulation, property rights and the informal economy
This paper will show that the informal black market activity negatively impacts upon a nation's potential economic growth. However, the informal economy is not the cause of restricted growth, but merely a manifestation of the underlying problem of excessive governmental regulation over private property rights and interests. Such interference misallocates limited resources by forcing producers and consumers to channel economic activities into the black market away from the formal economy in order to avoid the excessive regulatory scheme and the resulting associated excessive costs of operating legally. Where the regulatory scheme is complimentary to market forces rather than oppressive and contradictory, producers and consumers universally have shown a preference for official economic activity, rather than continued participation in the informal, illegal economy. New entrepreneurial producers feel encouraged to enter the market for the first time as the cost, both money and time, to establish a business are eased. As a result, countries which respect property rights an are free of excessive regulations have negligible informal economies.
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