What is impact of informal economy?

Answer 1

An informal economy is another term for a black market. Black markets generally rear their ugly heads in the face of restrictions on legality of certain actions or in the case of price controls.
In the first instance, drugs can be used as an example. It is currently illegal to purchase and sell drugs. This does not mean that it does not occur; instead, it simply occurs in a black market. Black markets such as this tend to be more violent than the formal market, since they are already illegal and tend to be participated in by the members in society who least likely want to follow the law anyway. Since it is part of the informal economy as well, there is a loss in tax revenue on these transactions. This causes taxes for all other legal transactions to be slightly higher than it would be if the transactions in the informal economy were also captured. (On a side note, not all informal economies are necessarily run by criminals bent on doing evil acts. The neighborhood kid who mows your grass and doesn't report the income to the IRS is part of the informal economy as well).
The other type of informal economy or black market does not necessarily pertain to money. In the face of price controls, such as rent control in New York, the decision on who gets to rent an apartment does not depend on who will pay the most, as it would in an unregulated market. Since this cannot determine who gets the resource, other factors begin to take prominence. An individual may be willing to pay more under the table to the landlord, or some other perk may be given, such as mowing the grass and shoveling snow or some other responsibility that may fall to the landlord. This is also part of the informal market and has some impact.

Generally, the informal economy has an impact in that it does not allow GDP to capture all the transactions in an economy, and in instances of taxes, some of the tax base is missing.