In: Economics
1 The transaction cost theory was propounded by Ronald Coase. The meaning of transaction cost is when goods and services are provided from the market rather than getting it from firm itself.
The different type of transaction cost are as follows
Cost related to search and information
Cost related to bargain and decision
Cost related to enforcement
According to chase, if one wants to understand the economic system, and to have good economic policy, considering transaction cost is very important.
Transaction Cost theory tries to explain the reason Of existence of a firm and why the activities are sourced out to external environment. Ronald Coase also describes that every firm will expand until and unless it is doing cheaper activities within the company. Coast believed in doing transactions intrafirm rather than doing it intrafirm.
Coase suggested that for an organized transaction its cost must be lower within the firm rather than the market.
Another factor of transaction cost theory pertains to negative externality, which means due to some outside factor, one is getting loss due to it
For example if there is a company causing alot of pollution in water due to which fishes dies, it will be a negative externality to the fishermen. For this property right solution is given by coarse in which he explains how rights can be exercised, whether rights are separable and enforceable.
In the above situation the fishermen can either get compensation or the polluter will reduce the pollution.
2. asset specificity is important as in the case of dealing with the assets that are specialized, the problem that occur after the contract regarding the opportunistic behaviour will be of higher degree.
3. Alchian and Demsetz's theory is often viewed as a property rights theory of firm as the theory is built from the Ronald Coase transaction cost theory and addition to it, as this theory describes that inspite of relying on external exchange market it would be cheaper for a firm if the organization of firm is done to calculate the marginal productivity of inputs.