Double co-incidence of wants

Definition of double coincidence of wants –

This occurs when two people have goods they are both happy to swap in exchange. i.e. a perfect barter exchange.

double-coincidence-wants

If you two individuals place equal value on 4 eggs and a loaf of bread. Then this exchange would be a double coincidence of wants and enable an efficient transaction.

In a barter economy (which has no money) people have to swap goods. E.g. you pay me in eggs and I teach you economics. Clearly, a barter economy has significant limitations. It requires two people to have goods they are willing to swap.

If you have eggs to sell, and I have economic lessons to offer, this would be no good because I don’t necessarily want to swap economic lessons for eggs. There is no double coincidence of wants.

However, if you had a new lightweight bicycle you were willing to swap for 10 economic lessons, I would be happy to do the deal. However, in practice, there is rarely going to be a double coincidence of wants. A barter economy becomes very limited and reduces the scope for specialisation of goods.

Favour economy

Economic anthropologists argue this double coincidence of wants is very rare, but in the real world, transactions are often done on the basis of favours. In other words, one person may give shelter, but at harvest time, there is a social expectation you will repay the favour by helping out with collecting the crops

Money and efficient transactions

Fiat money – paper currency with little intrinsic value – helps to overcome this problem. It doesn’t matter if you don’t want economic lessons, I can pay you cash for your goods, which you can use to buy whatever you want. This cash is widely accepted. Therefore, we don’t have to worry about having the right goods and services to swap. This eliminates a significant transaction cost in barter economies.

Original Source

W.S. Jevons (1875), Money and the Mechanism of Exchange, Chapter 1, paragraphs 5-6. London: Macmillan.

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