Economics Dictionary of ArgumentsHome
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| Transaction costs: Transaction costs are expenses incurred during the exchange of goods, services, or assets beyond the actual price. They include fees, time, effort, and information necessary for completing a transaction, encompassing negotiation, verification, and enforcement costs. These costs can affect market efficiency and influence decisions on whether to engage in economic exchanges. See also Efficiency._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Ronald Coase on Transaction Costs - Dictionary of Arguments
Kiesling I 12 Transaction costs/Coase/Kiesling: The basic idea is deceptively simple: transaction costs determine what a firm does in house and what inputs it buys, so firms perform functions internally that are cheaper (given a specific level of quality) for them to accomplish than through independent contracts in markets. >Firms/Coase. The firms contract with others for functions that are cheaper to accomplish through markets than by organizing internally. This paradigm may seem basic, but it has sparked a wide range of research and created new fields of inquiry in economics, management, and political science. If a firm is successful and faces sufficient demand to expand, it can expand by increasing the amount of its production, by expanding into related product lines (product differentiation), or by merging with a competitor (horizontal integration). It can also integrate backward by producing its own inputs, or forward into more finished goods and marketing (vertical integration). Coase argued that the comparison between transaction costs and organization costs determine the size and boundaries of the firm as well as the extent of vertical integration. „[A] firm will tend to expand until the costs of organising an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market or the costs of organising in another firm.“ (1937(1): 395) >Specialization/Adam Smith. Kiesling I 23 Transaction cost/externalities/Coase/Pigou/Kiesling: (…) when defining property rights is prohibitively costly or not feasible (as in, say, air pollution), bargaining to negotiate transfers of rights cannot happen. Property rights definition and enforcement costs are a category of transaction costs. Low transaction cost: Situations with low transaction costs are more likely to see welfare-enhancing bargaining, while … High transaction cost: …high transaction costs can prevent such conflict resolution. Example: An example of Pigou’s that Coase discusses for other reasons illustrates the challenge of transaction costs: the operation of a railroad through rural land in the 19th century. Railroad companies purchased land and built rail networks to run trains pulled by coal-fired steam locomotives, which threw off sparks that could cause fires that destroyed some adjoining crops or woodlands. In a situation such as the transcontinental railroad in the United States, the railroad company operated over thousands of miles and could potentially emit sparks on land owned by thousands of different farmers. This situation and others like it present a considerable transaction cost challenge, one that is common in many situations where there is a conflict in resource uses. Bargaining: In order for the farmers to bargain with the railroad over the rights to emit sparks and the rights to unharmed crops enough farmers would have to gather together to represent the interests of all affected farmers - in other words, the transaction costs would be high. In situations like these, the courts determine which party has legal liability for harms created, and enforce compensation if necessary. Pervasiveness: An overarching theme of Coase’s work on social cost is that transaction costs are pervasive. Because of that pervasiveness courts are important institutions whose decisions have implications for both the efficiency of outcomes and the distribution of profits across parties. >Law/Coase. Kiesling I 33 Def Transaction costs/Coase/Kiesling: Transaction costs, that is, the costs of defining property rights, shape incentives and how we organize the use of resources. As the example in the previous chapter of spectrum license auctions shows, these ideas have significant policy implications, even if their implementation takes decades. The use of emission permit trading in the United States to reduce air pollution is another example; it too, has long-lasting and great beneficial effects. Emission permits: The design of the emission permit trading program has several Coasean features, particularly the emphasis on institutional design to reduce transaction costs. 1. Coase, Ronald H. (1937). The Nature of the Firm. Economica 4, 16: 386-405. - - - Shirky I 29 Transaction Costs/Institutions/Coase/Shirky: each institution has to invest considerable effort to maintain its own structure and internal discipline. Self-preservation can become the ultimate goal. This type of transaction costs is one of the fundamental limitations of institutions of all kinds. >Institutions. Transaction costs/Coase/Shirky: Ronald Coase answered in his famous essay of 1937 "The Nature oft he Firm" (1) why there are companies at all: They make it possible to reduce transaction costs. Shirky I 30 In the end, it is cheaper to organise workers in a company than to have them all competing against each other in the labour market. Transaction costs arise, for example, if options are to be discovered and agreements between participants have to be concluded. A company is successful if the costs of managing employees are lower than the potential profit from it. 1. R. H. Coase, Economica 4(16), November 1937, pp. 386-405, also at www.cerna.ensmp.fr/Enseignement/CoursEcoIndus/SupportsdeCours/COASE.pdf._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Coase, Ronald Kiesling I L. Lynne Kiesling The Essential Ronald Coase Vancouver: Fraser Institute. 2021 Shirky I Clay Shirky Here Comes Everybody: The Power of Organizing Without Organizations New York 2009 |
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> Counter arguments against Coase
> Counter arguments in relation to Transaction Costs
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