What are transaction costs?

Transaction costs refer to the expenses incurred by buyers and sellers when executing a sale. These costs can include a variety of factors such as search and information costs (finding the right product or negotiating with a seller), bargaining costs (the time and effort taken to negotiate the terms of the sale), and enforcement costs (ensuring that contracts are upheld and both parties honor their agreements).

In essence, transaction costs are critical to understanding how markets function because they can influence the efficiency and feasibility of trades. When transaction costs are high, it may discourage market participation or lead to a different outcome than what one would expect in a perfectly competitive market.

This concept is essential in macroeconomics as it helps explain various market behaviors and the importance of institutions in reducing these costs, thus facilitating more efficient economic interactions and trade.