Legal and Illegal Production and Trade Under Monopoly with Transaction Cost

Using illegal trade in narcotics as an example, where regular seizure of part of the merchandise by the law‐enforcing authorities imposes a transaction cost on the monopolist supplier, this paper demonstrates the result that a higher transaction cost might increase the volume supplied for trade. The result of the formal model also applies to the opposite situation, e.g. when trade is legal, as in seventeenth‐ and eighteenth‐century maritime trade, but pirates illegally seize part of the merchandise to impose a transaction cost on the traders. The more general implications of this analysis are also discussed.