Question

According to Coase's theory of the firm, why do firms exist? How do firms contribute to the efficiency of the market economy in ways that networks of independent contractors do not? How are the boundaries of the firm best established?

Answer 1

The transaction theory of cost or Coase theorem is developed by Ronald Coase. There are a number of transaction costs put forward by this approach include enforcement costs, decisions costs and information costs.

Coase accepts that firms exist since they get their outputs from the market as opposed to inside. As indicated by Coase: "So as to do a market transactions it is important to find who it is that one wishes to deal with, to direct dealings paving the way to a deal, to draw up the contract, to embrace the investigation expected to ensure that the details of the agreement are being watched."

Firms add to the efficiency of the market by disguising plans and activities and expelling the requirement for people to need to utilize price signals. networks of independent contractors are not bound together in their approach. While sorted out as a network, they each have their individual procedures, in contrast to firms. Along these lines, firms make the market economy more efficient than systems of private contractors.

Limits of a firm are best settled by forcing rules and regulations on the entirety of its internal individuals. By going about in general, a firm can manage its condition and force limits that shield its investments and internal culture from in any case possibly troublesome external factors.