Fairness & Nature: Transaction Costs
Transaction costs are the cost of monitoring and enforcing social norms and regulation/legislation. Within institutional economics, institutions determine the costs of economic transactions and hence also determine the well-being of society as a whole by providing incentive structures. Regulations can make the costs of certain activities change according to certain criteria. For example, a requirement for all waste water from industrial premises to be purified before being released into the environment would increase costs for these companies and another example could also be payments made to those who choose not to own cars or extraordinarily high charges for limited car parking spaces (as happens in the German neighbourhood of Vauban).
However, the success of institutional arrangements is dependent upon the transaction cost associated with that particular arrangement in relation to the resources that are actually available. Take the example of a requirement for purification of waste water from industrial premises, costs would be low if no enforcement occurred but it would require a great deal of trust that the industrial premises would keep to their end of the deal. Alternatively, premises could be checked with strict fines in place for premises found to be disobeying the regulation but this would come at great cost due to the labour, time and paperwork involved in the monitoring process. Hence, transaction costs are increased by a lack of trust within a community.
Transaction costs are also increased as legislation becomes more complex. Loopholes may appear (think the UK tax system) which prevent thinks from being black and white and more checks need to be carried out increasing the cost of monitoring and enforcing the regulation. Complexity can also arise out of the manipulation of laws by pirates. These are individuals or groups with powerful interests that manipulate laws in order to put resources under their own control. Linking this in to the principles of justice mentioned in the first part of this course, this means that institutions may not act in the interests of all and justice may not be achieved as the regulations are not made from behind a veil of ignorance and are therefore made not in the interests of equality but rather in the interests of a minority.