What Are Transaction Costs?

To the uninitiated, transaction costs are often mysterious at best and dubious at worst. Even among economists who use the term often, there are misunderstandings as to what transaction costs actually are. I argue that much of the transaction cost "image" is caused by the lack of a workable definition. In this essay, I define transaction costs as the cost of establishing and maintaining property rights. This definition illustrates that these costs arise out of more than information costs, that they are not just like taxes, and that they are necessary to explain any distribution of property rights