The most direct benefit from improved access to markets is a decrease in transaction costs, including transport and storage costs. In developing countries, all-weather roads act as a catalyst that accelerates economic development by reducing transaction costs. A transaction costs model can explain most of the price variation between areas with good access and areas with bad access. Therefore, this type of model becomes a more powerful tool in analyzing the impact of rural roads when compared with the standard transport cost differential approach. In a study of rural roads in bangladesh, poor access was found to keep competitive agricultural products traders from entering markets. For example, with poor access there is a relative shortage of buyers compared with the number of sellers. However, in areaswith good access the opposite is true. If the traders did not perceive that accessibility was a problem, then competition would increase until the price differential would approach transport costs plus spoilage. Traditional transport cost approach begins with transport, storage, and spoilage savings that are passed on to agricultural producers who respond to the higher prices and profit. This approach tends to underestimate the benefits because the actual increase of producer prices is significantly higher. The transaction costs approachshould be used to estimate agricultural benefits of new rural roadsbecause these models can distinguish between financial and economicprices. The results of the bangladesh case study using the transaction costs approach were much greater than those predicted by the transport savings model. This paper appears in transportation research record no. 1274, Transportation and economic development 1990: proceedings of a conference, williamsburg, virginia, november 5-8, 1989.
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