Transaction Costs, Risks and Policy Failure

Abstract

Policy-making involves complex, dynamic factors. Economic and social variables and the complexities of ecological systems create a turbulent mix. Coupled with the complexities of choice of instrument, the details of design, and the variables involved in implementation, the potential for 'the best laid schemes' to go 'agley' are high. It ought to be expected that policies often fail to deliver what they promise on paper or in political debate. Given this it is surprising how little attention is paid to the potential sources of policy failures, significant among which is transactions cost. Transactions occur whenever there is a decision that results in a flow of resources or information between people (or between people and the environment). It is through transactions that policies are given effect. In markets, the pivotal transactions involve finding counterparties, negotiating and formalizing agreements, and transferring value between the parties. For regulation and taxation the types of transactions include: gathering evidence; imposition of the obligation; collection and prosecution. For social strategies like voluntarism, the transactions include recruitment, coordination, deployment and measurement. For any strategy, failure of a central transaction will result in failure of the strategy (to at least some degree). Transactions are for this reason the central consideration for policy implementation.