The transaction cost approach to the theory of the firm was created by Ronald Co
ID: 1113093 • Letter: T
Question
The transaction cost approach to the theory of the firm was created by Ronald Coase. Transaction cost refers to the cost of providing for some good or service through the market rather than having it provided from within the firm. Coase describes in his article "The Problem of Social Cost" the transaction costs he is concerned with:
In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on.
More succinctly transaction costs are:
search and information costs
bargaining and decision costs
policing and enforcement costs
Coase contends that without taking into account transaction costs it is impossible to understand properly the working of the economic system and have a sound basis for establishing economic policy.
What are the ways of reducing transaction costs? Do you think online shopping is good for reducing transaction cost? Is there any disadvantages?
Explanation / Answer
The ways of reducing transaction costs are: (1) Standardization can be used as an important tool in reducting transaction cost. (2) Intermediaries can be used to reduce transaction cost. They can ensure that the information is correct and reduce the need to re enter iinformation or te need for the customers to transfer information from one system to another. They can help reduce transaction cost through economies of scale.(3) Another way of reducing transaction cost in small projects is by utilizing management structures and lessons from existing projects. (4) By forcing people to pay for the risks or the harms they impose upon the society, nby internalkizing the externalities or social costs of employing hazardous technologies.
Yes online shopping is a good way to reduce transaction costs. Because in online shopping there is no need for clerks and cashiers as customers shop for themselves and execute self checkout when finished.
Yes there are some disadvantages also. Online shopping increases expenditure of customers as they buy more things because they do not get tired of shopiing online and i is also time consuming as they spend more time in checking trends and offers.
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