Which of the following is an example of an external transaction cost?

• A. The pollution caused by a factory that affects nearby residents
• B. The rent paid by a business for its office space
• C. The price a consumer pays for a product in a store
• D. The wages paid by a firm to its employees

Answer: (A)

Verified step by step guidance

1. Understand the concept of transaction costs: these are costs incurred during the process of making an economic exchange, such as searching for information, bargaining, and enforcing contracts.
2. Recognize that external transaction costs refer to costs imposed on third parties who are not directly involved in the transaction, often called externalities.
3. Analyze each option to see if it represents a cost borne by someone outside the transaction:
4. - Rent paid by a business is a direct cost to the business, not an external cost.
5. - Price paid by a consumer is a direct cost within the transaction.
6. - Wages paid to employees are internal costs to the firm.
7. - Pollution caused by a factory affects nearby residents who are not part of the transaction, making it an external transaction cost.