Homework Question on Coase’s Theory of the Firm
- Outline and assess Coase’s theory of the firm. To what extent, if any, do transactions costs provide an adequate explanation of why firms exist?
- Can Coase’s theory explain why different firms perform differently?
- Any fact or sentence that is not general information and that is derived from research must be sourced. Please do source everything that is not written from knowledge. Everything that is derived from research must be sourced correctly or else will be viewed as plagiarism.
- Writer can add more sources but try to make it minimum 10 sources.
Homework Answer on Coase’s Theory of the Firm
Prior to this theory, traditional economic theory suggested that it was possible to produce goods and services in the absence of the firms. This theory interpreted the market as being efficient in that the best-suited suppliers were able to provide goods and services at cheap prices (Xiao 2004, p. 41). In such a case, economic theories of the time did not see the need of the firms in the market because traders could contract goods and services as opposed to hiring workers.
Despite this fact, firms existed and operated in contrast to the economic theories of the time. In response to this case, Coase developed his theory of the firm to explain the existence of the firms in the market irrespective of the efficiency of the price mechanism in allocating resources (Williamson & Winter 1991, p. 138). He started by questioning the existence of the firms in the market from a transaction point of view and established that firms minimized some transaction costs that price mechanism introduced in the market.
This theory claims that firms exist in the market as alternative methods of allocating resources because the price mechanism is inefficient in some instances. For example, it might be inefficient to follow the price mechanism in allocating resources whenever the prices of the goods and services keep on changing. It would also be inefficient to allocate resources in the market depending on the changes in the supply and demand as the price mechanism does.