Don’t you love your iPhone? What about your Android? Which do YOU like better? iPhone sort of brings you to a seamless, forefront of completely integrated technology, whereas Android brings you to the forefront of centralized computing and development. Oh, and of course, the iPhone has its classy, sleek exterior while the Android has a plethora of different mobile devices from which to pick. Now, although, both are incredible advancements in the mobile world, sadly you can only pick one…
This is a transaction cost…or to be more specific…opportunity cost. A transaction cost can either be an accountable expense such as your taxes paid, interest on a loan, etc; or it can be an economic (often intangible) cost such as opportunity cost. These are day-to-day expenses that are often times overlooked, but can be incredibly important in making any decision. For example, taxation is incredibly important for both the federal and state government. But according to the Laffer curve, opportunity cost plays a role in what percentage the government can charge for income tax. Tax at too high of a rate and tax revenue goes down either because of the substitution effect (people don’t see the point in working if they’re getting taxed at 100%). Tax too low and the income effect comes into play (people don’t work as much because they have enough income to enjoy their leisure more) on top of the fact that there is a chance that there won’t be any income coming in at all (tax rate at 0%). This opportunity cost affects the government’s decision on the degree by which to impose an accountable transaction cost (taxes) on the public.
To summarize, transaction costs affect every decision that we make, whether we know it or not. Whether figuring out the payout for an iron condor, the trade-off with purchasing a good in Oregon vs California (shipping + taxes & opportunity cost of time waiting), or understanding the elasticity and diminishing marginal utility of a demand curve for labor (for the income effect and substitution effect), transactions costs could possibly make or break your decision. So, the next time that you execute a trade or analyze your personal expenses, don’t forget the cost of transaction!
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