Theory of Transaction Costs

The Theory of Transaction Costs explains that economic exchanges aren't just about the price of goods or services—they also include the costs involved in making those exchanges, such as finding information, bargaining, enforcing agreements, or overcoming legal hurdles. These costs can influence whether people or companies choose to trade directly, form long-term relationships, or produce things themselves. Essentially, transaction costs can affect how efficiently markets work and help explain why certain organizational structures, like firms or markets, develop. Reducing these costs often leads to more effective and efficient economic activity.