Transaction cost – a barrier to trade
How many times have you been sitting home late at night, hungry, wishing you had a meal from your favorite fast-food restaurant? You would gladly pay the $4 price for the value meal you have in mind, but you feel it is just not worth the time and effort to get dressed and make that drive. The costs of the time, effort, and other resources necessary to search out, negotiate, and conclude an exchange are called transaction costs. High transaction costs can be a barrier to potentially productive exchange.
Because of transaction costs, we should not expect all potentially valuable trades to take place, any more than we expect all useful knowledge to be learned, all safety measures to be taken, or all potential “A” grades to be earned. Frequent fliers know that if they never miss a flight, they are probably spending too much time waiting in airports. Similarly, the seller of a car, a house, or a ballet ticket knows that finding the one person in the world willing to pay the most money for the good is not worth the enormous effort it would take to find him or her. Information is costly. That is one reason that perfection in exchange, as in most things we do, is seldom worth achieving.
The Internet has significantly lowered transaction costs. The auction Web site eBay enables sellers to reach millions of potential buyers with little effort and few costs. Buyers can easily search eBay for items they want to buy, even if the items are located halfway around the world. Other Web sites, such as MySimon and Pricescan, scour online shopping sites for the lowest prices so buyers don’t have to. Consumers can also readily find detailed information about products on any number of sites. Amazon.com posts prices, product information provided by manufacturers, and reviews from other buyers. By reducing transaction costs, the Internet creates value and wealth. It expands the number of trades that are made, and makes it faster and easier to make them.