frictionsexternalities

Friction externalities, also known as friction costs or transaction costs, refer to the impediments and inefficiencies that arise in economic transactions. These costs are not inherent in the product or service itself but are a result of the process of exchange. They can manifest in various ways, including the time and effort required to find a buyer or seller, the costs associated with negotiating terms, the expenses incurred in drafting and enforcing contracts, and the uncertainty and risk involved in completing a transaction.

These externalities can arise in both markets and non-market settings. For instance, in a labor market, the cost of searching for a job or employee, interviewing candidates, and onboarding new hires represents a friction externality. In the context of government policy, regulations and bureaucratic procedures can also create friction externalities by increasing the time and resources individuals and businesses must spend to comply with them.

The presence of friction externalities can lead to suboptimal outcomes. They can reduce the volume of trade, prevent mutually beneficial exchanges from occurring, and lead to a less efficient allocation of resources. Economists study friction externalities to understand how they impact market efficiency and to identify potential policy interventions that could reduce these costs. Examples of such interventions might include improving information flow, standardizing contract terms, or streamlining regulatory processes. The goal is generally to lower the barriers to interaction and facilitate smoother, more efficient transactions.