The type of economy you are describing is known as the "informal economy." Let's explore the characteristics and implications of the informal economy in detail:

Definition:

The informal economy includes all economic activities that are not regulated by the government and are not included in the formal sector. This can include small-scale businesses, street vendors, freelance workers, and any other forms of employment or business operations that do not adhere to official regulations or tax requirements.

Implications of the Informal Economy:

• Reduced Tax Revenue: Since activities in the informal economy are not reported to tax authorities, governments lose potential tax revenue. This can affect the funding for public goods and services such as education, healthcare, and infrastructure.
• Lower Tax Morale and Compliance: When a significant portion of the economy operates informally, it can lead to a culture of tax evasion, where even formal sector participants may feel less inclined to comply with tax laws.
• Higher Control Costs: Governments may need to invest more resources into monitoring and enforcement to combat informal activities, which can be costly and challenging.
• Lower Economic Growth Rates: The informal economy can hinder economic growth by limiting the development of formal businesses and reducing the effectiveness of economic policies.
• Institutional Change and Boost in Production: On the positive side, the informal economy can drive institutional change by highlighting inefficiencies in the formal sector and pushing for reforms. It can also contribute to the overall production of goods and services, providing employment opportunities and supporting livelihoods for many people.

Overall, the informal economy plays a complex role in many countries, presenting both challenges and opportunities. It is essential for governments to find a balance between regulation and support to harness the potential benefits while minimizing negative impacts.