This paper analyzed the effect of transaction costs on supply response of rice producers in Iran. Some of these producers participate in market as sellers or buyers and others remain self-sufficient. Farmers have different responses based on fixed and proportional transaction costs. The data used in this research consisted of information about 260 rice producers in Mazandaran province in 2004. The results indicated that lowering transactions costs would increase output by both increasing market participation and increasing production for market participants. Given that transaction costs affect market participation, aggregate supply will respond to changes in the transaction cost structure through its effect on market participation. It is recommended that policies reducing transaction costs be applied as a complementary policy to price policies to affect supply response.

Keywords: Fixed and proportional transaction costs, Supply response, Production threshold, Rice

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