Practice question · Multiple choice
A firm hires a cleaner on a permanent contract rather than calling a cleaning agency each week. Coase's theory predicts when that swap makes sense. What is the deciding quantity?
Hints
- The market price is not the only thing you pay to use the market. What else does each weekly call cost?
- Ask why the firm does not contract out every single task, one by one, every morning.
Show the answer
B. Whether the transaction costs of contracting exceed internal management
Why
Using the market is never free, every contract must be found, priced, watched and enforced, and a firm is the decision to pay a manager instead. It answers the question Coase noticed nobody had asked: if markets allocate so well, why is the economy full of islands where they are switched off?
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