What is a possible economic impact of the presence of a black (or shadow) economy in a country?

• A. It can lead to a reduction in government tax revenues, affecting the provision of public goods.
• B. It eliminates the need for government intervention in correcting market failures.
• C. It always increases the measured GDP and improves official employment statistics.
• D. It ensures that all externalities are fully accounted for in market transactions.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what a black (or shadow) economy is. It refers to economic activities that are not reported to the government and therefore not taxed or regulated.
2. Step 2: Recognize that because these activities are unreported, the government does not collect taxes on the income generated from them, leading to a reduction in government tax revenues.
3. Step 3: Consider the consequences of reduced tax revenues. With less money collected, the government may have fewer resources to provide public goods and services such as infrastructure, education, and healthcare.
4. Step 4: Evaluate the incorrect options: the black economy does not eliminate the need for government intervention in market failures, nor does it always increase measured GDP or improve official employment statistics, since these activities are unrecorded.
5. Step 5: Also note that the black economy does not ensure externalities are accounted for; in fact, it often leads to less regulation and oversight, potentially worsening externalities.