Transactions Incur Costs Beyond Price
Resources are spent finding counterparts, verifying information, negotiating terms, and monitoring agreement compliance. Transaction costs reveal these processes. The formal possibility of entering into a contract differs from actually concluding a beneficial transaction.
Rights Determine the Starting Point of Negotiation
In situations where actions affect each other, such as noise, pollution, or land use, who holds which rights matters. In a world with transaction costs, rights allocation and remedies can change outcomes. When reading Coase's discussion, it is useful to focus on comparing different institutions rather than conclusions that erase real-world costs.
Distinguishing Rights Attribution and Protection Methods
Preventing infringement and requiring compensation for infringement can induce different behaviors. Problems differ when it is difficult to know the other party’s value, when there are many negotiating parties, or when measuring damage is difficult. The distinction between property rule and liability rule is an analytical framework organizing these differences.
Institutions Also Have Operating Costs
If only the costs of market transactions are calculated, excluding courts or administrative agencies’ costs, comparisons are incomplete. Costs of information gathering, judgment errors, enforcement, and rule changes must also be reviewed. Efficiency analysis does not automatically resolve distributional and rights issues. Good research begins by revealing what is compared and which values are considered separately.
Questions to Consider Together
- Who Bears the Costs of Finding Negotiation Partners and Enforcing Agreements?
- How Do Different Protection Methods Affect Behavior Even with Identical Rights?
Recommended Literature
- The Problem of Social Cost
- The Nature of the Firm
- Property Rules, Liability Rules, and Inalienability: One View of the Cathedral
- Toward a Theory of Property Rights