ANALYSIS Transaction cost measurement for evaluating environmental policies Laura McCann a, * , Bonnie Colby b , K. William Easter c , Alexander Kasterine d , K.V. Kuperan e a Department of Agricultural Economics, University of Missouri, 214B Mumford Hall, Columbia, MO 65211-6200, United States b Agricultural and Resource Economics, University of Arizona, Arizona, United States c Department of Applied Economics, University of Minnesota, United States d Agra CEAS Consulting Ltd., Imperial College, Wye, University of London, England e World Fish Center, Dhaka, Bangladesh Accepted 4 August 2004 Abstract Policy choice and policy design need to take account of transaction costs in order to increase the efficiency and sustainability of policies. However, transaction costs must first be measured to be included in the evaluation of alternative environmental or natural resource policies. While a number of studies measure transaction costs, there has been no systematic treatment of the fundamental issues involved. This article examines the issues involved in transaction cost measurement and makes recommendations regarding a typology of costs as well as the measurement methodologies themselves. In particular, methods used for nonmarket valuation of environmental goods may have potential for the measurement of transaction costs. D 2004 Elsevier B.V. All rights reserved. Keywords: Transaction costs; Environmental policy; Measurement methodologies 1. Introduction bWhat gets measured gets managedQ is an axiom in the business world. Analyses of public policies need to include transaction costs, as well as transformation costs, and to be included, they must be measured. Transaction costs can be substantial; measured mag- nitudes have ranged from 8% of water purchase cost for the California Water Bank (Howitt, 1994) to 38% of total costs for an agricultural technical assistance program (McCann and Easter, 2000). Nontrivial magnitudes mean that transaction costs will affect the optimal choice and design of policy instruments. Yet another reason for incorporating transaction costs in our empirical analysis of public policies is that, by 0921-8009/$ - see front matter D 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2004.08.002 * Corresponding author. Tel.: +1 573 882 1304; fax: +1 573 882 3958. E-mail address: McCannL@missouri.edu (L. McCann). Ecological Economics 52 (2005) 527 – 542 www.elsevier.com/locate/ecolecon