Tunnel trade - and the impact of demand and supply of goods on either side

An article in Bloombergbusinessweek (February 4, 2013) describes the tunnels (now numbering 500 but up to 1000 at one time) between the Gaza strip and Egypt. Transporting motorcycles, cars, contraband between the two sides enabled owners of these tunnels to charge a premium of $1000 to transport a bike from Egypt. The cost to build a tunnel, estimated at up to $ 250,000, is financed with an upfront payment and a share of the profits associated with goods transported – a revenue sharing contract. But more recent moves by Israel to open the borders has eased the availability of goods, thus lowering the incentive for tunnel trade. What does the efficiency of pricing of tunnel trade say about the predictability of embargoes as a political strategy ? The more recent moves to tax tunnel flows to fund the government in Gaza is claimed to have incented the creation of longer more complex tunnels – capital investments whose payoff is in the illegal movement and thus avoidance of taxes – what does this say about the magnitude of the taxes and projected revenues ?

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