Course

Transaction Costs

Instructor: Alex Tabarrok, George Mason University

Transaction Costs : Costs necessary for an economic exchange to take place. This is from the video “ The Coase Theorem ” in the Principles of Microeconomics course.

Transaction Costs: Costs necessary for an economic exchange to take place. This is from the video “The Coase Theorem” in the Principles of Microeconomics course.

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Transcript

The market for pollination works despite the fact that bees seem to create this external benefit because transactions costs are low. That is, all of the costs necessary for buyers and sellers to reach an agreement are low. In particular, bees simply don't fly very far. So, an agreement between one beekeeper and one farmer can internalize all the externality. That is, if the beekeeper puts his bees in the middle of the farm, basically the only crops, which are going to be pollinated are the crops of that single farmer.


So once an agreement is made between that beekeeper and that farmer, all of the externalities have been internalized. There are no bystanders once the beekeeper and the farmer make an agreement. Moreover, the property rights here are very clear. The beekeeper has the rights to the honey. The farmer owns the crops that the bees pollinate. There isn't going to be a lot of bargaining and disagreement about who owns what. The property rights are clear. In other cases of externalities, some of the ones we've looked at previously, neither of these things are true. Transactions costs are high and property rights are unclear.

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