What is an implication of high transaction costs in organizing economic activities?

When transaction costs are high, firms must consider how these costs affect their overall profitability and operational efficiency. A significant implication is that firms may choose to establish internal structures—such as vertical integration or even creating subsidiaries—to minimize these costs. By bringing certain activities in-house, firms can avoid the inefficiencies and uncertainties associated with negotiating and enforcing contracts with external parties. This strategy helps to streamline operations, retain more control over the production process, and ultimately reduces transaction costs associated with market exchanges.

In contrast, the other options suggest scenarios that do not effectively address the problem posed by high transaction costs. Engaging only in low-cost transactions may not be feasible as businesses could find critical transactions are more expensive. Preferring market mechanisms does not align with the goal of minimizing costs in the face of high transaction costs. Lastly, avoiding collaborations altogether could inhibit growth and innovation, as partnerships can be beneficial despite the associated transaction costs. Thus, establishing internal structures is a proactive approach to manage and mitigate the effects of high transaction costs in economic activities.