Transaction Cost
A transaction cost is the cost of finding, negotiating, completing, and enforcing an exchange beyond the price of the good or service traded.
Transaction: An exchange of goods, services, or rights between parties. Transaction costs arise from arranging and carrying out exchanges.
Coase Theorem: A result that, under ideal conditions and clearly assigned property rights, bargaining can lead to an efficient outcome regardless of initial allocation. Its assumptions expose how positive transaction costs can block mutually beneficial bargaining.
Ronald Coase: A British economist whose work explained firms and social costs through the institutional conditions of exchange. His 1937 essay made the cost of using markets central to explaining firms.
Make-or-Buy Decision: A firm's choice between producing an input internally and purchasing it from an outside supplier. The choice compares internal coordination costs with the costs of market contracting.
Production Cost: The resources used to create a good or deliver a service. Production costs concern making the item; transaction costs concern arranging its exchange.
Information Asymmetry: A condition in which parties to an exchange have unequal information relevant to its terms or risks. Unequal information can make it costly to assess quality and negotiate terms.
Property Rights: Legally or socially recognized rights to use, control, transfer, or benefit from resources. Clear rights can make exchanges easier to define, bargain over, and enforce.
The Nature of the Firm: Ronald Coase’s 1937 essay explaining why production is sometimes coordinated within firms rather than through markets. It framed market exchange costs as a reason firms organize production internally.
Asset Specificity: The degree to which an investment loses value when redeployed to a different use or partner. Specialized investments can create dependence and make renegotiation or supplier changes costly.
Opportunity Cost: The value of the best alternative forgone when a choice is made. Opportunity cost is a general measure of sacrifice, not a category limited to exchange.