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Economics
- ISSN: 2155-7950
- Journal of Business and Economics
Does It Always Pay off to Reduce Transaction Costs?
Adam Koronowskiď€
(Faculty of Economics and Management, Collegium Mazovia, 01-903 Warszwa, Poland)
Abstract: This paper is intended to identify situations when eliminating or reducing transaction costs may have a negative impact on the economy. When such situations are recognized the theoretical statement that transaction costs always hinder optimal allocation of resources and that they are a source of inefficiency can’t be accepted unconditionally. This reservation may rescue us from making mistakes driven by a false pursuit of efficiency. This paper discusses three examples when reducing or eliminating transaction costs badly affects the economy. These examples pertain to, firstly, “cheap banking”, secondly, introduction of a common currency (eliminating the costs of exchanging national currencies) under unfavorable conditions and , thirdly, the effects of low transaction costs of international capital movements as a particular case which is subject to the theory of second best. The examples serve to develop the main argument of the paper that sometimes it is better not to put too much emphasis on reducing transaction costs.
Key words: transaction costs; economic optimization; institutional economics
JEL Codes: D02, D23, D61
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