what are transaction costs

What are transaction costs?

Learn about Transaction costs with Aiyaary.

In this blog, Learning perspectives explore the meaning of transaction costs. Transaction costs are those costs that are incurred when buying or selling goods and services. These costs include labor costs, transportation costs, and commission costs. This movie scene talks about transaction costs.

Movie Case Study

Army chief Pratap Malik is speaking with an Indian government official. He is narrating how bad the situation is regarding the new arms deal.

He mentions that an extra transactional cost is added to the truck deal. So whenever new trucks are purchased, the seller claims that the truck travels from Hong Kong to London to the Czech Republic and then to India. This significantly increases the cost. However, in reality, the trucks were directly shipped from the Czech Republic to India.

What are the types of transaction costs?

Transaction costs are quite pervasive. You would find them in financial products, normal day-to-day goods, and contracts. It can come in the form of commissions, government fees, or appraisal fees. Transaction costs diminish the actual returns. Research and information costs are also part of the transaction costs. There is cost associated with researching, such as conducting market research and gathering and processing of data. Negotiation costs can include legal fees and other expenses also form part of these costs.

Regulatory costs are those costs that are incurred for complying with government regulations. This requires legal fees and financial updates. Opportunity costs are those where potential benefits are forgone by choosing an alternative. It is also included in these costs.

Transfer costs include the transportation of goods, services, or property rights. Monitoring costs are those costs that include overseeing and ensuring the success of a contract.

Examples of Transaction Costs

Examples can include internet fees or phone bills. It also include transportation and shipping charges. It can include costs for maintenance of an asset. Money spent on conducting surveys and group interviews.

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