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

According to Coase's theory of the firm , firms exist because of the following reasons:

Firms exists in the market so that they can economize on the cost for coordinating of all kinds of economic activities that happen and also that the firms bear with them the characters of price mechanism.

The firms contribute to the efficiency of market economy in a way that the firms encourage the spirit of competition in the economy which will will lead to better products. The firms also help in the product development by bringing research and development into picture. They as well as help in increasing the efficiency of a product in an economy by reducing government interference as well as supplying more tax dollars to the economy.

The boundaries of a firm are best established through horizontal and vertical boundaries. Vertical boundaries of the firm are the boundaries that involve the activities of a firm which help us to the about the firm's efficiency of production. Coming to horizontal boundary. It basically means the quantity and quality of products that a firm produces.