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Coincidence of wants
From Wikipedia, the free encyclopedia
The coincidence of wants problem (often "double coincidence of wants") is an important category of transaction costs that impose severe limitations on economies lacking money and thus dominated by barter or other in-kind transactions. The problem is caused by the improbability of the wants, needs or events that cause or motivate a transaction occurring at the same time and the same place.
In-kind transactions have several problems, most notably timing constraints. If you wish to trade fruit for wheat, you can only do this when the fruit and wheat are both available at the same time and place (and, additionally, only if someone wishes to trade wheat for fruit). That may be a very brief time, or it may be never. With money, (broadly speaking, any commodity used as a medium of exchange) you can sell your fruit when it is ripe and take the money. You can then use the money to buy wheat when the wheat harvest comes in. Thus the use of money makes all commodities become more liquid.
Besides barter, other kinds of in-kind transactions also suffer from the coincidence of wants problem in the absence of money. For example, when wealth is transferred during marriage, divorce, inheritance, and other crucial life events, or during the collection of taxes or tribute, it is improbable that this event will coincide with the recipient's desire for the commodities the payor can readily obtain, unless they are intermediate commodities, i.e. money. In the absence of money, all of these transactions suffer from the basic problem of barter -- they require an improbable coincidence of wants and events.
Because of the severe costs imposed by the coincidence of wants in an in-kind economy, money tends to emerge naturally as some form of commodity money.
- Jevons, W. S. (1875), Money and the Mechanism of Exchange, London: Macmillan.
- Menger, Carl, "On the Origin of Money"
- Ostroy, Joseph M., and Ross M. Starr (1990), "The Transactions Role of Money", in the Handbook of Monetary Economics.