Question

1. Explain the different forms of Transaction Costs and the factors that will affect them.

Answer 1

SOL : Transaction costs are costs incurred that don't accrue to any participant of the transaction . They are sunk costs resulting from economic trade in a market . In economics , the theory of transaction cost is based on the assumption that people are influenced by competitive self-interest .

FORMS OF TRANSACTION COSTS

1. Bargaining costs : These are the costs related to coming to an agreement that is agreeable to the parties involved in drawing up a contract . Bargaining costs can either be very cheap or can be very expensive .

2. Search and information costs : These are the costs associated with looking for relevant information and meeting with agents with whom the transaction will take place . Stock exchange is one such example , as they bring the buyers and sellers of financial assets together .

3. Policing and enforcement costs : These are the costs associated with making sure that the parties in the contract keep their word and do not default on the terms of the contract . People often deviate from the from the contract , and thus enforcement costs are incurred while governing contracts .

FACTORS AFFECTING TRANSACTION COSTS

1. There is a lot of uncertainity and unpredictability in the world which affect the parties to come in contract .

2. With bargaining and asset specificity , organizations that enter into transaction find it expensive to leave them .

3.The inherent opportunistic behaviour of individuals in an economy makes it harder for contractual agreements to be enforced after a long period of time .