In terms of business strategy, managers will attempt to adopt business strategies that
attempt to: (c) minimize transactions costs
(2) Finding a way to create and capture value is part of: (a) business strategy
(3) If transactions costs can be reduced in a marketplace, then total producer and
consumer surplus will: (a) increase
(4) Sealed bid constructions contracts are examples of market games that are: (a)
simultaneous and non-repeated
(5) What happens to producer surplus and consumer surplus if transactions costs are
reduced?
Transaction costs are costs incurred due to inefficiencies. Some common types of
transaction costs are search and information costs (costs involved with determining if a
product is available, who has the lowest price, etc), policing and enforcement costs (costs
incurred to ensure the other party complies with the terms of the purchase contract) as
well as bargaining costs (costs involved in coming to an agreement on price, etc). These
costs accrue to neither producers nor consumers. Therefore, by reducing these costs, the
size of the total producer and consumer surplus enjoyed by market participants will
increase overall.
(6) In the area of agricultural chemicals, the Environmental Protection Agency requires
detailed labeling on cans of pesticides and herbicides. Generally speaking, the industry
not only does not oppose these labeling reuirements, but even supports government
sponsored education programs on how to use these chemical. Why?
The improper labeling or use of these chemicals would be very bad for the industry. It
could lead to lawsuits, poor publicity, product bans, etc. Therefore, by supporting
labeling and education campaigns, the producers of agricultural chemicals can help to
avoid such issues. Put another way, chemicals like these can cause what are known as
“externalities”. Externalities are a cost or benefit (in this case a cost) incurred by
someone who did not agree to or who is not involved the action causing the cost or
benefit. In this case, the potential negative health implications of the use of agricultural
chemicals is a negative externality that could impact residents that live in close proximity
to a site where the chemicals are used. Therefore, by supporting labeling and education
campaigns, the producers can help minimize externalities, and thus minimize the
potential for legal action or poor publicity.