Explain what's meant by Transaction Cost Economising. Also analyse Essay

Explain what's meant by Transaction Cost Economising. Also analyse between contributions made by Coase & Williamson - Essay Example For example, the searching cost (the energy and effort taken to find out the good), the cost of traveling for availing it, waiting time to get it and even the effort of paying it self are the costs incurred above and beyond the market price of that particular commodity. This ‘above’ and ‘beyond’ market price is the transaction cost. Now days, transaction cost is significant in each and every potential transaction. Transaction Cost Economics and Economizing The Transaction Cost Economics is the approach of analyzing the economic organization which considers transaction as the basic unit of analysis and it stresses that economizing the transaction cost is the central part of the analysis in the study of economic organizations. The cost of factors of production (resource inputs) , ie, land ,labor and capital, should be called as resource cost and for the better production, the resource cost should be the minimum. For enhancing the production and productivity, t he co-operation and investments in specialization are highly desirable. Co-operation between economic actors and investments in specialization are the major components of productivity enhancement. For achieving this co-operation and investment specialization, cost arises due to the inclination of self interested owners of inputs to shirk the commitments. The costs that incurred for the minimizing the shirking include: i) Searching cost incurred to identify the owners of the inputs (when, where and what type of the required good is available in the market with minimum price) ii) Negotiating or bargaining cost is the cost incurred for implanting an acceptable agreement between these two parties. In stock or asset market, it is the distance between ‘bid and ask’. It also includes the costs of any incentive given to minimize the shirking. iii) Monitoring cost and iv) Enforcement cost In spite of all these costs, residual loss from shirking may exist because of the inability of the above mechanisms to bring the shirking to zero in a complex and uncertain economy. Hence, the costs incurred to minimize the shirking plus the residual loss from shirking together constitute ‘transaction cost’(Hill, 1995). Contributions of Coase and Williams to the theory of Transaction Cost Economizing The origin of the theory of transaction cost economizing can be traced to a contributions of John R Common, 1932, Ronald H Coase 1937 and 1960, Friedrich Hayek, 1945, Herbert Simon, 1951, Chester Barnard, 1938, Philip Selznick , 1949 and Alfred Chandler, 1962. (Williamson, 1981). Among this series, the works of Ronald H Coase and Oliver Williamson are the real milestones. Coase laid the foundations of the Transaction Cost Approach while Williamson built a strong structure for the analysis. Both of them provide suitable and strong theoretical contributions to Transaction Cost Economics under the broad framework of Institutional Economics and they focus on how tran sactions have to be organized in order to economize the transactions. While describing the applications of transactional economics, it is assumed that different dimensions of transactions have to be identified and the alternative governance structure has to be described. Economizing of transactions can be achieved by discriminatory assignment of transactions to governance structures. The application of transaction cost approach lies both in the demarcation of efficient boundaries between firms and markets and in the governance