Efficiency VS Transaction Costs
In our generation, world rapidly changes every day because of the application
of technology. I still remember when I was a child; I played with cards and
small games that I begged my parents to buy for me whenever we went to the
grocery store. Two years ago, I was babysitting my cousin's son, Justin. He
laughed at me for not having games on my IPhone and he would treat of
well-behaving in home for a day, just to play games on my IPhone.
I am not planning to write my whole blog talking about my miserable
childhood. But to be honest, I love my childhood. I enjoyed the joy from
reading books, playing with cards and doing some outside activities. From the
experience I am sharing here, I try to make a point that every transaction to
get access for better efficiency has to pay, and sometimes it is really hard to
define if efficiency is a good thing or not.
From class, professor helps me to understand organization better by
asking a series of questions: Why do we need organization if market could acquire
equilibrium itself? Is market can get to the point where all parts of
market can attain equilibrium? If we need organization, does it always work? If
not, why it does not work or how to make it work?
The answer to the series of questions, I believe, is yes. we need
organization because sometimes market will fail, market does not know how to
redistribute resources to make sure it is better off for the whole society. The
small example will be, let's just say the salary of a football coach in
University of Illinois is $1 million and guess what is the grant or income of a
phd student in the Department of Economics? The answer to it will be mostly
less than $1 million. How do you think of this situation? I would say,
admittedly, the football coach did a great job of training the football teams
and school will earn reputation by the football team. Every member of school
will be proud of our football team, and would like to shout at "Go
Illini" at any football game. But is it going to the best for the school
to distribute the resources like that? Probably I would say no. If I make a
transaction to give the phd students more money and take some money from the
football coach, what will be the effect of this action? There might be some
transaction costs that the football coach was not satisfied about his salary,
and he wouldn't put as much as effort into his teaching experience, or even
lead to the decision of changing his job in a different university. Is it a
good transaction cost to pay, in terms of to be more efficiency? Personally, I
think it will be a good idea to do it, because we are a research institution
and all the students, faculty and support team will be better off if the
decision like this is made.
This is a good example showing that the transaction cost is positive but
to get to efficiency, it is a good leverage. Sometimes, on the other hand, we
pay more than we thought about to make a transaction, and maybe to be more
efficient; however, if regarding of if it is a good thing or not, I will
hesitate for a while.
Back to the small example I use for my childhood, I think sometimes
technology brings efficiency but the transaction cost is much more than we
thought about. It is not just about the training that we give it to the
customers, the research of pros and cons scientists make effort of from time to
time, it might change our prospective for how to be happy, and even bigger like
how to live a life? I don't want to get deeper into if technology has more
advantages or more disadvantages, but I am simply just saying that sometimes we
put a lot of time to investigate the obvious pros and cons of a transaction,
but we omit something "hidden," like value of to make a transaction.
In education, technology did a good thing like applying I-Clicker, E-book,
videos to help demonstrate more topics and give students and professors more
time to focus what they might be interested in. Instead of writing all the nots
on the blackboard, the instructor can put more time into preparing the lecture,
considering new way of thinking, and elaborating more materials as well as
giving students time to self-learning. From students’ perspective, they don't
need to carry heavy textbooks from class to class, they don't need to prepare a
lot of things for class, so they have more time to think, and to dig into more
materials from Internet. Then, let's take a step back to think about what are
some transition costs in this process? Professors might spend hours and hours
to prepare for the instructions of I-Clicker, contact the service of these
goods to make sure students won't have to spend too much time on figuring out
how to use new technology, answer e-mails from students about questions for
these little things. Students might have to redo the homework just because of
the poor connection of Internet, and etc. All these things are the transaction
costs, and in a broad view, some people might never read a paper-version book
in their whole book. Thinking of taking notes in the book, hanging around in
the bookstores, and siting under the tree with reading, I just feel like I missed
it so much.
In conclusion, I enjoy the new way of thinking of efficiency and transaction costs, and I also believe that we need people who take care of organization for us, in every part of our life. Lastly, I would really like to challenge you to think about transaction costs, even when you are enjoying the efficiency of life.
My sense in reading this is that you are confounding efficiency the way it is used in the popular press, where it is sometimes equated with using technology more intensively, with how economists discuss efficiency. Let me illustrate with the example you used - taking money from the football coach and giving it to economics doctoral students.
ReplyDeleteThat might be called a "Robin Hood" move - take from the rich and give to the poor. If you think of people as inputs only into some university production, perhaps there is an efficiency notion somewhere in such transfers. But if you think of these people first and foremost as people, then you are making the grad students better off but the football coach worse off. It is not a Pareto improvement. It may be fairer, but by the Pareto criterion the two situations can't be ranked.
On the issue of preferring physically tangible things (the playing cards you had as a kid) to their virtual alternative, I too feel that way. I like older movies without the special effects but with good story lines. Lots of the newer movies don't interest me that much. I've seen a few movies done in 3D. The first time it was fun. I don't need to see that over and over again however. So I am sympathetic with your nostalgia for childhood. But I don't think that says anything about rejecting the notion of Pareto improvement.
Similarly, with your income redistribution example you really are not getting at transaction costs, the way they are talked about in M&R, though you use the expression repeatedly. So let me ask a related question to get at revealing how transaction costs work. Have you had a TA or an instructor whom you didn't think of was very competent on the subject matter? How would the department know whether the person was competent or not?
When I was at Northwestern, I TA'd during my second year. No first year graduate students in economics were TAs at that time. By the second year, all the the graduate students had been through the core classes taught in the first year. Teaching in the second year, but not the first was a way to assure some competence in subject matter knowledge. But it definitely lessened the pool of graduate students who could TA. Here there is greater reliance on TAs. And there are first year graduate students who serve as TA. But, of course, there is also a substantial tuition differential between NU and Illinois.
If you have been lucky and have had nothing but good TAs and Instructors, bully for you. But if you have not been so lucky, the explanation is in how public research universities like Illinois manage the transaction costs in assuring that students get quality instruction.
Firstly, I really appreciate you putting time into reading and making comments. I kind of understand why you mentioned I look upon "efficiency" and "transaction cost" not in the same way how economists looked as. Let me put it in a different way, and please let me know if that is a better statement. Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources. The example I used for salary distribution between PhD Student and football coach implies that it is an action that trying to maximize social desirable distribution of resources, but not a lot to do with Pareto efficiency, because taking down the salary from the coach might cause worse off for the market of football coach. This action does not contribute to Pareto Improvement to maximize the efficiency overall.
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