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The Nature Of The Firms By Coase

897 words - 4 pages

Ronald Coase: The Nature of the Firm

In times of a lot of perfect competitive markets and a lot of transactions between firms in the b2b or b2c sector the term of transaction costs arises. First of all you have to define what transactions are: Transactions are the implicit and explicit contract negotiations for goods and services between at least 2 people. The transactions theory now tells us that there are costs for every step of these contract negotiations and also costs after the contract conclusion.
Transaction costs could appear before (ex-ante) the contract conclusion and after (ex-post) the conclusion. Ex-Ante costs are Information-, Negotiation- or Contract costs. Ex-Posts ...view middle of the document...

Furthermore, Coase also deals with the limits of a firm within his framework. His idea is, that as long as the Marginal Costs (MC) of one additional worker, do not exceed the Marginal Revenue (MR), a Firm will always hire new labour. But once MR < MC, the Firm has reached its limit, thus, creating an optimal size for a Firm.
Concluding Coase's work with an example: Consider the invention of the telephone and how it affected the theory of the firm. This invention had a higher impact on the costs of using the market (reducing them), than on the costs of using the organization, pushing the MC of using the Market downwards. Looking at the graph shown above, this leads to the fact that the size of a Firm will be reduced as it gets more efficient using the market, which requires less transaction difficulty, i.e. less workers involved.
In 1991, Ronald Coase received the Nobel Prize in Economics, for his discovery of the importance of transaction costs and property rights for a well functioning economy. Coase did this by creating an economic situation where these factors do not exist.
He considered a Farmer and a Rancher, each one having a piece of land, located side by side. One day, a Cow of the Rancher destroys the crops of the Farmer, creating a loss for him. In the absence of Transaction costs and legal rights, the Farmer would be better off by paying a specific amount of money to the Rancher, making him breed less cows. As long as this amount is below the loss, the cow would induce to the Farmer and above the loss the Rancher has by breeding less...

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