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Outline and assess Coases theory of the firm. To what extent, if any, do transactions costs provide an adequate explanation of why firms exist Can Coases theory explain why different firms perform differently - Essay Example

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In his seminal paper, “The Nature of the Firm”, Ronald Coase argued that there was more to the firm than the incorporation of inputs in order to generate outputs. Developing one of the first economic theories about the firm, this theory contends that firms have concrete…
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Outline and assess Coases theory of the firm. To what extent, if any, do transactions costs provide an adequate explanation of why firms exist Can Coases theory explain why different firms perform differently
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Extract of sample "Outline and assess Coases theory of the firm. To what extent, if any, do transactions costs provide an adequate explanation of why firms exist Can Coases theory explain why different firms perform differently"

Download file to see previous pages Coase also proposed that the marginal costs involved in coordination by firms increases as the number of transactions increase. Coordination with another firm through the use of price mechanisms becomes less costly at a point. The size or scope of a firm is, thus, determined by this point at which marginal costs involved in organizing more transactions in a firm are more than those involved with another firm or within the market (Curwen, 2012: p49). This paper will seek to discuss Coase’s theory of the firm, investigating the extent to which transaction costs explain the existence of firms, as well as whether this theory explains the reasons for different performance for different firms.
The theory of the firm seeks to address two major themes; the reason why firms exist and the determinants of a firm’s scope and scale. Classical economics assumes the existence of firms and characterizes these firms in terms of demand and cost curves and production functions (Curwen, 2012: p51). It is easy to imagine production in the absence of firms, which would result in the exchange of labor and capital between individual traders for payment. Firms are normally understood as being the embodiment of an institutional structure, in which economic activity coordination occurs through price control. Coase, however, observed that this coordination of economic activity through the use of price mechanisms had costs, which he referred to as transaction costs. Therefore, the cost of economic activity can be lowered using alternative institutional arrangements. Firms exist in order to make the coordination of economic activity less costly. In addition, firms are also characterized by the lack of mechanisms of price. There are several sources of transaction costs, including the cost of writing contract, negotiating contracts, and learning prices (Curwen, 2012: p52). This theory is based on the assumption that price mechanisms are not utilized where it is ...Download file to see next pagesRead More
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