Transactions Costs in Economics: Definition, Theory & Examples

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  • 0:02 What Are Transaction Costs?
  • 0:30 Theory of Transaction…
  • 1:00 Types of Transaction Costs
  • 2:40 Lesson Summary
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Lesson Transcript
Instructor: Jamie Stamm
In this lesson, we'll discuss transactions costs and their role in contributing to the economy. Our discussion will include definitions of key terms, the theory of transaction costs, and the different types of transaction costs.

What Are Transaction Costs?

In economics and business, transaction costs are the costs we incur when we make economic exchanges during the purchase of goods and services. Transaction costs may cover many areas. Some include charges for communication, such as telephones and the Internet, fees charged for legal services, or costs for purchasing and maintaining a car and paying for public transportation. Basically, transaction costs are the costs of playing a part in the market.

Theory of Transaction Cost Economics

The theory of transaction cost economics, also called social cost theory, is a contractual concept developed by British economist Ronald Coase in 1937 and refined by American economist Oliver Williamson in 1975. The theory addresses the importance of companies or firms in a market economy. It proposes that hierarchical organizations, like firms, may distribute resources more efficiently than an imperfect or limited bargaining system, like a market.

Types of Transactions Costs

According to the theory of transaction costs economics, there are three main types of transaction costs. These include search costs, bargaining costs, and policing costs. Let's explore each one in more detail.

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