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Why would sellers go to a "place" where many others are also selling the same product? Wouldn't it better to go someplace off by yourself, so you can get the monopoly price? Well, the answer is that transactions"take place," meaning they require a context. Amazingly, it's better to go where all the other sellers are going, because of the problems of triangulation, transfer, and trust.  The Sears catalog was a "virtual" (paper) place, and Amazon is another "virtual" (online) place. But the answer to why we do that is "transaction costs."

But then I go back in time to my own introduction to the notion of transaction costs, in a class taught by the remarkable economist Yoran Barzel. The puzzle is so simple that it seems dumb: why do we measure lettuce by the head, meat by the pound, and diamonds by the caret?

Yoram Barzel, Measurement Cost and the Organization of Markets.
The Journal of Law & Economics, Vol. 25, No. 1 (Apr., 1982), pp. 27-48
https://www.jstor.org/stable/725223

Brian Albrecht, Brian Albrecht at Int Cent for Law and Econ
https://pricetheory.substack.com/p/are-transaction-costs-just-costs

Plus, the TWEJ!

And our first letter, as a homework assignment.

Are congestion taxes an effective way to overcome transactions costs pertaining to efficient use of roads?  Probably not the best.  There is no externality with congestion, because everyone stuck in traffic has moved to the harm. Those who could be held liable for causing congestion are not those who pay for a variable toll, but those who come later.

We'll talk about this in Week 3!

If you have questions or comments, or want to suggest a future topic, email the show at [email protected] !

You can follow Mike Munger on Twitter at @mungowitz