Min transaction cost individual costs and social

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Min. Transaction cost- Individual costs and social costs aren’t the same, so reducing transaction costs is difficult because, people need to use the lowest cost method- people don’t do this because consumers will choose lowest cost to them resulting in a loss of diversification likely Integration- the cost of making a payment on one side of the country should be the same on the other side of the country (lack of integration is typically use of different currencies) Competitive pricing- economies of scale and natural monopolies are barriers to competitive pricing, although ability to exploit market power is limited (regulation) Stability- unique to payment system. Stability in the value of the dollar, changes in the value of money can degrade the efficiency of the payment system. ii. Why is the payments system of Europe inefficient? How does it differ from the payments systems in the United States? Costs are not minimized, the cost of making a payment across the border is high and the cost of payment in one country is different than another which is also lack of integration o US has no thought to state borders therefore, each state has the same payment system Each country has different payment and clearing systems, each country had a clearing house but they lacked a clearing house that oversaw all countries iii. What difference does the inefficiency of the payments system make to the European economy? Profitable investments are not being made because the costs are too high
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C. Read “Beyond Voice” (Item 8.1) and “In Kenya, Phones Replace Bank Tellers” (Item 8.6) and answer the following questions: i. What are the benefits of mobile money to users? What are the benefits to the economy as a whole? Benefits to user: offers banking services to people in remote areas, it’s quick and easy to use, a safe place to hold money, reduces transaction costs and makes it easy to send money home o Cheaper and easier way to send money home to families in Kenya. Not a lot of access to banks as people were moving to cities and had to send money home to rural area Benefits to economy: promotes savings, lower transaction costs of transferring money which encourages better allocation of resources (no money wasted on transportation or delay in money received from an order form) ii. If the issuer is a mobile phone company, is mobile money really ‘money’? Does an increase in mobile money increase the total quantity of money in the economy? Yes, it is generally accepted as a means of payment or medium of exchange Increase in mobile money doesn’t necessarily increase the quantity of money in the economy- if the phone company takes the money and lends it out then yes there’s an increase iii. Does the issuer (mobile phone company) make a profit from offering mobile money? What is the cost? What are the sources of revenue?
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