Question

What threats does the informal economy present to firms operating in the formal economy? Use examples from your personal experience with the informal economy.

Answer 1

Informal economy is an grey area in economy where income earned is neither taxed or people earnings are not monitored by government. The income earned in informal economy is not even included in GNP of a country

Ex: Street vendors, beggars etc

Black market is also an informal economy.

Informal economy pose a great threat to formal economy in such a way that people who are earning under informal sector will not pay taxes to the government but they enjoy benefits from the government.

They don't have market obligations or price regulation. If there are crisis or any peak season period they raise prices as they like.

People earning under informal sector is more than people earning under formal sector.

Ex: If a person who runs oil business will cheat government by selling that in Balck Market at higher prices. Governments cannot impose taxes on these income which he earned in Balck Market as government even does not know how much he is earning.