The Nature of the Firm by Coase - Essay Example

The major obstacles to Coasian bargaining emerge when property rights have been defined poorly (Buchanan, 2005). This paper will discuss Coase theorem as an alternative to government regulation in terms of facilitating for the provision of goods and services. Coase theorem is regarded as the basis for economic analysis, especially in the event of government regulation when externalities are present (Walter, 2001).

Based on the essay The Nature of the Firm, Coase explained as to why an economy comprises various firms as opposed to a large number of independent and self-employed individuals who undertake contracts with each other. Since it is possible to undertake a transaction without the presence of any organization, Coase was puzzled by the appropriate conditions that should be imposed to facilitate the emergence of firms (Walter, 2001).

Today, most firms emerge when an entrepreneur begins to employ people. In this perspective, Coase considers the appropriate conditions under which it would be sensible for an entrepreneur to pursue the help of employees instead of contracting out to facilitate for the completion of a certain task. While using the market, there are various transaction costs involved because the cost of acquiring a good or service through the market is above the usual price. Other additional costs comprise those involved while searching for information, bargaining, policing, enforcement, and in keeping secrets of the trade (Coase, 1988). All these costs significantly raise the cost of acquiring something from a different party. This reveals that firms emerge to internalize the production process to facilitate the delivery of a product and hence avoid these costs.

Coase notes that a natural limit prevails that provides a limit as to the extent to which a firm should produce internally (Buchanan, 2005). Also, there are times when a manager of an organization may make mistakes concerning the allocation of resources. Additionally, the decreasing function of the entrepreneur raises the overhead costs, which tend to countervail the costs that a firm incurs. From this perspective, the government is needed to ensure that firms operate in line with the set regulations to make sure that they do not impose unsustainable costs on their customers (Buchanan, 2005).

The “Problem of Social Cost” allowed Coase to provide insight into the challenges that are attributed to externalities. In case transaction costs are absent, the assignment of property rights initially does not make a difference regardless of whether an entrepreneur can realize efficient economic outcomes. The allocation of property rights initially determines whether it is efficient for a firm to incur additional costs, especially in the event of damages (Walter, 2001).

The paper has revealed that Coase made a significant contribution concerning facilitating efficient economic allocation, and determining how to handle externalities that prevail. Therefore, based on transaction and social costs, the government can intervene in the production process of a firm to ensure that it is operating optimally and efficiently. Read More