Student name: Don Keerthiratna WijendraStudent Number: 8748935Assessment Reference : 8748935/ME/July/12/1 |

Transaction Cost Economics is defined as “The cost associated with exchange of goods or services and incurred in overcoming market imperfections. Transaction costs cover a wide range: communication charges, legal fees, informational cost of finding the price, quality, and durability, etc., and may also include transportation costs. Transaction costs are a critical factor in deciding whether to make a product or buy it.” (www.TheBusinessDictionary.com). Coase showed that traditional basic microeconomic theory was incomplete because it only included production and transport costs, whereas it neglected the costs of entering into and executing contracts and managing organizations. Such costs are commonly known as transaction costs and they account for a considerable share of the total use of resources in the economy. When transaction costs are taken into account, it turns out that the existence of firms, different corporate forms, variations in contract arrangements, the structure of the financial system and even fundamental features of the legal system can be given relatively simple explanations. If transaction costs were zero, no firms would arise. All allocation would take place through simple contracts between individuals. By incorporating different types of transaction costs, Coase paved the way for a systematic analysis of institutions in the economic system and their significance. (MLA style: "The Prize in Economics 1991 - Press Release". Nobelprize.org. 13 Sep 2012).
In the past decade, the global economy has been hit with a double crisis. From the subprime debacle resulting in century old Investment banks being wiped out to banks being bailed out by their Governments. The crisis is not over with Europe still battling this issue. The crisis has taken