CIA: 1

NEW INSTITUTIONAL ECONOMICS

TRANSACTION COST

Name: Ankita Dutta

Reg. No: 1837020

The New Institutional Economics is a rapidly growing interdisciplinary field combining

economics, law and organizational theory. It helps to “understand the institutions of social,
political and commercial life” (Klein). Williamson defines a “transaction as a process in
which goods or a service are transferred through a technologically separate interface”. Thus
the transaction is not only a market exchange, but it covers all the exchange procedures
within the organization. Transaction costs include the costs of resources utilized for the
creation, maintenance, use, change, and institution and organisation.

Transaction costs are of three types:

1. Market Transaction Cost: The cost associated with the market, between the buyer and
seller. It involves the search effort and time in search of information about the product
available. In market place the, consumers transaction activity is measured as sellers
price equated as the price greater than the market price.
2. Managerial Transaction Cost: The cost involves monitoring decisions, managerial
opportunism etc. It also includes the production cost and the internal cost.
3. Political Transaction Cost: The cost that occur due to the political influences, the
changes in law or administration that the society has to borne is included in the
political transaction cost.

TRANSACTION COST OCCURING IN THE PURCHASE AND SELL OF A PLOT

OF LAND.

Transaction cost is positive when operated in economy. The transaction cost is selling a
plot is accounted in legal institution. When a plot of land is sold, it includes not only the
monetary cost but also many small intermediate cost are involves in it. Thus the cost can
be classified as:
  The advertisements posted by the seller for advertising the sale of plot which
account for market transaction cost. This includes the cost of printing and
spreading the information.
 The search and information cost incurred by the buyer, which includes the time as
cost and also the opportunity cost in finding the seller willing to sell the plot.
 The bargaining cost for negotiation of the price of the plot between the buyer and
the seller.
 The supervision and enforcement cost involved for monitoring the plot, the area
around it and the delivery time and the amount to be paid by the buyer.
 The cost involved in setting up, maintaining and legally transferring the plot to the
buyer by the owner which involved political transaction cost.
 The cost incurred by the buyer in transferring the total amount to the seller in form
of cheque or any banking transaction.

Thus, all the cost together accounts for the transaction cost that occur in an economy in every
small or big transaction. The transaction cost comes from the transaction activity while
transaction activity comes from transaction function.