Environmental Engineering Reference
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and (3) policing and enforcement costs. He documented that all of these
costs represent resource losses due to lack of information. Transaction
costs are a real and unavoidable aspect of any economic system. It is not
even possible to eliminate transaction costs by prohibiting all transac-
tions because such a decree would have to be deliberated and enforced
and other institutions would emerge to replace banned markets. Libecap
(1989) points out that having lower transaction costs is a necessary rather
than a sui cient condition for adoption of an institutional arrangement.
The inevitability of transaction costs means that any notion of Pareto
optimality 7 is incomplete until transaction costs are incorporated (Grii n,
1991). It is therefore appropriate to examine transaction costs when evalu-
ating the potential of new institutions as alternatives to the existing one.
Transactions dif er in a variety of ways. Williamson (1985) identii es
asset specii city, uncertainty and frequency as three major attributes of
transactions that have direct cost implications. These three attributes of
the transactions are also relevant to many natural resource systems. Asset
specii city can be dei ned as investment in assets specii cally relevant for
a particular transaction. This is generally regarded as the most impor-
tant of the three attributes because it creates market imperfections and
allows asset owners to earn rents (Drennan, 2000). It can take the form
of a physical asset related to location, an asset dedicated to a particular
consumer, or a tangible asset that can be easily duplicated. It turns out
to be the case that asset specii city creates information asymmetry, which
permits owners to earn economic rents. Having private information
makes it possible for people to behave opportunistically towards others
who contract for their services. However, asset specii city also reduces the
mobility of assets into alternative uses, with consequent market imperfec-
tions (Drennan, 2000). Most of the physical assets in the form of natural
resources (forests, wildlife, i sh and so on) are very site specii c. Based
upon this site specii city, species are considered endemic or endangered in
their natural habitat. Transactions in natural resource systems also dif er
in the required specii city of human resources. It is useful to distinguish
between idiosyncratic site-specii c knowledge, especially the indigenous
knowledge of a local community, and scientii c knowledge required for
planning and implementation of resource management activities (Birner
and Wittmer, 2000).
The second attribute of transactions with costly implications for con-
tracting is the extent of uncertainty surrounding the contract. Transactions
surrounded by little or no uncertainty require minimal governance because
ex ante and ex post information about the transaction is available to all
concerned parties while uncertainty in dei ning and observing perform-
ance makes it dii cult to place contracts on that performance (Drennan,
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