Question

Each of the 10 families on a suburban block is likely to have its own power lawn mower. Why don’t families more often share a single lawn mower? Try to enumerate the principal transaction costs that stand in the way of such a cooperative arrangement. (250-300 words)

Answer 1

The 10 families on the block are likely to have their own power lawn mover because of the various transaction costs associated with the cooperative arrangement. Transaction costs essentially arise in any transaction because of the fact that information asymmetry prevails and individuals are not perfectly rational (that is bounded rationality among the individuals). The transaction costs that are involved in sharing a single lawn mover are positive, they can be listed as:

1. There are other negotiations involved about the time that each family keeps the land mover. If all the families are free on weekends, then it will be difficult to set a time slot for everyone which is why more often than not everyone has their own lawn mower.

2. The maintenance costs of the mower, if the mower is damaged then who would pay for it. It would be difficult for them to agree to pay for repair if damaged when someone else was using it because they did not damage it.

3. If one of them moves out, it will again create an issue as the one moving out would want the money back and the others would not agree for the same.

4. To avoid all these situations, drawing an agreement or contract can be sought but then again there are costs associated with the same.

Because of all these negotiations and costs involved to come to an arrangement, people find that it is easier to just own a power lawn mower. It becomes difficult to come to a common consensus in such a situation.