James d. Gwartney

ELEMENT 1.5
Transaction costs are an obstacle to trade.

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Video:
The Economics of the Shawshank Redemption
The grocer, for example, is a middleman. (Of course, today’s giant supermarket reflects
the actions of many people, but together their services are those of a middleman.) Think of the
time and effort that would be involved in preparing even a single meal if shoppers had to deal
directly with farmers when purchasing vegetables, citrus growers when buying fruit, dairy
operators if they wanted milk or cheese, and ranchers or fishermen if they wanted to serve beef
or fish. Grocers make these contacts for consumers, place the items in a convenient selling
location, and maintain reliable inventories. With properly functioning markets, the services of
grocers and other middlemen reduce transaction costs significantly, making it easier for
potential buyers and sellers to realize gains from trade. These services increase the volume of
trade and promote economic progress.
Later, we will discuss how imperfect markets may arise, such as when government or
technology gives a monopoly privilege to an individual or firm. The dangers of a single, or
monopoly
(?)
, supplier are especially evident in the case of vital natural resources such as when
one country is the only source for another’s natural gas or oil.
In recent years, technology has reduced the transaction costs of numerous exchanges.
With just a few swipes on a touch screen, buyers can now acquire information about potential
sellers of almost every product. Apps are routinely used to shop for movies, clothing, and
household goods, locate a hotel room, obtain tickets for a major concert or big football game,
and even hail a taxi. These reductions in transaction costs have increased the volume of trade
and enhanced our living standards.