Barter

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The Barter System

“Standard economic theory dismisses barter as an extinct and inefficient system of transactions that may only be observed in backward economies.” (Dalton, G. 1982). There are many problems associated with barter transactions including double wants and the cost of finding potential buyers for the various goods and services. However, there have been arguments that the most important deterrent to the barter system is the cost of gathering information about the characteristics and attributes of goods available for exchange, maintaining that when the cost of gathering this information exceeds barter benefits, a monetary system is used. Also, a lack of information about the quality of products is what makes a monetary system more appealing over the barter system, and since money is universally recognized it is preferred. When money is used to conduct transactions, a shorter time period is required to make a trade because exchange of high quality products is encouraged.
However, a few studies have presented a rationale for legal restrictions on barter under certain conditions (Wallace, 1988). For example, consider a household’s interest to barter in order to supplement their monetary purchases in the presence of unexpectedly high demand. It has been argued that when money and the supply growth rate are relatively small, monetary equilibrium causes the inefficient barter to be squeezed out. However, when the opposite is true, the barter system does tend to drive out the vastly superior monetary system. This reaction is due to the adverse effect of barter by all households on the value of money consequently increasing the price of goods. Under these conditions, legal restrictions should be put on the bartering system in order to increase the demand for money and to improve social welfare.
Barter has been used for such transactions as an emergency or irregular method of trade by households, but it also h...