ECON 102 Lecture Notes - Lecture 20: Transaction Cost, Deadweight Loss, Externality

• School: University of Illinois
• Department: Economics
• Course: ECON 102
• Professor: Isaac Dilianni--- Universityof Illinois

Document Summary

Econ 102 - lecture 20 - transaction costs (continued) Total transaction cost: on graph, rectangular gap between buyer and seller"s cost. Creates a deadweight loss (neither buyer and sellers are making extra profits) Intermediary (middleman): a person (or organization) who facilities an exchange. They can help potential traders identify other, and charge a fee for this service. They can buy from one party and sell to another, and profit the difference in prices. Ie. selling a car to a dealer who will resell it to another customer. Without intermediaries, very few supplies will be sold. On graph, rectangle is total transaction cost, upper triangle is cs, lower triangle is ps, and right triangle is dwl. On graph, total transaction cost/revenue to intermediary rectangle is shorter with smaller dwl. Benefit buyers/sellers, reduce dwl, and earn revenue for themselves (win, win, Externalities: when an economic activity confers a benefit (positive) or imposes a cost win) (negative) on an unrelated third party.