A market is not perfect only because market agents are price takers but is also free of transactions costs and any impediment to the interaction of supply and demand for the commodity. Economists refer to these various costs and impediments as frictions. Frictions include ________.

Question

Quizplus · Accepted Answer

Frictions include bid-ask spreads charged by dealers and order handling and clearance charges. Taxes and government-imposed transfer fees are also frictions, but only if they are on the transaction itself, not on capital gains. The costs of acquiring information about the financial asset and restrictions on market takers are also frictions, but these are not mentioned in the answer choices. Financial liability that a buyer or seller may take and taxes on capital gains are not considered frictions.

A Market Is Not Perfect Only Because Market Agents Are