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Last week we began our discussion of transaction costs and why they are important for Christians to understand. Lowering costs associated with our activities when and where we can is an important part of whole-life stewardship.

Reflect back on the scripture we studied last week. In Luke 14:28-30, which tells the parable of the tower-builder, Jesus implores us to count the costs before we engage in certain activities. It would be wasteful if we started a project we could not finish.

The parable of the king going to war in Luke 14:31-32  teaches the same lesson. If a king is deciding whether to go to war, he must calculate his chances of success and the cost of waging war. Likewise, we should not engage in weighty and costly decisions without calculating the transaction costs.

Where do we see transaction costs in our lives today? In Common Sense Economics, economists Jim Gwartney, Richard Stroup, and Dwight Lee give us three broad types of transaction costs:

  • Physical obstacles: lack of road access, rivers, and mountains may make getting goods and services difficult.
  • Information obstacles: people may not know where to locate a good or service and must spend time trying.
  • Political obstacles: regulations, tariffs, quotas, price controls and licensing requirements for businesses.

Here are some real-life examples:

  • Physical obstacles: If you live in a small town surrounded by mountains, it might be more difficult for you to find a grocery store to deliver groceries to your house. You might have to drive an hour to the nearest airport. These represent physical costs that increase what you may “pay” to engage in these activities.
  • Information obstacles:  Have you ever found yourself with a broken appliance which sends you searching for a part you have never even heard of before? There are many things which we are ignorant of, and sometimes we need to gain knowledge quickly. The knowledge we don’t have represents an information obstacle. Technology has greatly reduced this cost in some sense. I can hop on the internet and gain information about what I need.  However, information costs will always be among us because we never have the perfect amount of information.
  • Political obstacles:  There are many problems we face in a fallen world. In many cases we seek government involvement to help solve those problems, and in many cases this is sought with the best of intentions. However, economics helps us understand that there are many unintended consequences that often get overlooked or ignored when we make decisions in the public sector.

Regulations, tariffs, quotas, licensing requirements and other political obstacles are additional costs on top of the capital requirements for opening and operating a business.

These legal hurdles cause many would-be small business owners to avoid entering an industry. People who want to start a small business with little capital requirements get blocked. This especially hurts people in low-income groups, who don’t have the money to afford these additional transaction costs.

An example of this involves the food-truck controversy going on in the state of Virginia as of late. Food trucks are very easy to start – you just need a great idea, a truck, and some food. They’re very popular, and growing in number.

As a result, brick-and-mortar restaurants are pushing back against the competition they face from food trucks. One news report lists the regulations that brick-and-mortar restaurants are asking government officials to place on food truck operators. Each of these regulations represents a political obstacle that makes it harder for someone with little money to start and operate a food truck.

Thus, transaction costs can disproportionately impact the poor. These costs limit a person’s ability to use their gifts and skills to open businesses and serve others. When we appeal to policy to solve some perceived problems, we often create unintended consequences in the form of higher transactions costs. 

Stewardship means doing our best to understand these costs and their impact on others. It means doing our best to understand the impact of our actions and our policies.

Where do you see transaction costs in your life? In your community? Leave your comments here

Dr. Anne Bradley

About Dr. Anne Bradley

Anne Bradley, Ph.D. is Vice President of Economic Initiatives at the Institute for Faith, Work & Economics. Anne received her Ph.D. in Economics from George Mason University. She is a visiting professor at Georgetown University and has previously taught at George Mason University and at Charles University in Prague. Read More...

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