Practice question · Multiple choice
According to Coase, why does production happen inside firms instead of through individual market contracts for every task?
Hints
- Think about what it costs just to use the price mechanism: searching, negotiating, enforcing.
- The firm forms when doing a task internally is cheaper than contracting for it.
Show the answer
C. Using the market has transaction costs that internal coordination can avoid
Why
Coase (1937): firms exist because market exchange itself is costly. When internal coordination beats the transaction costs of contracting, the task moves inside the firm.
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