Specialization allows us to expand total output. A group of individuals, regions, or nations will be able to produce a larger output when each specializes in the production of goods and services it can provide at a low cost, and uses its sales revenue to trade for desired goods it can provide only at a high cost. Third, voluntary exchange permits us to realize gains derived from cooperative effort, division of labor, and the adoption of large-scale production methods. Today, production of goods from pencils to automobiles involve specialization, division of labor, large-scale production methods, and the cooperation of literally tens of thousands of people. Without exchange, which permits us to have a much wider market for our output, these gains would be lost.
Transactions costs are an obstacle to exchange.
Voluntary exchange is productive because it promotes social cooperation and helps us get more of what we want. However, exchange is also costly. The time, effort, and other resources necessary to search out, negotiate, and conclude an exchange are called transaction costs. Transactions costs are an obstacle to the creation of wealth. They limit both our productive capacity and the realization of gains from mutually advantageous trades.