Practice question · Multiple choice
Coase asked why firms exist at all if markets allocate efficiently. What does the existence of large firms tell us about markets?
Hints
- Ask what it costs to arrange an exchange, not to produce the good.
- Why would you employ someone rather than contract the work out each morning?
Show the answer
B. That using a market is not free: search, negotiation, enforcement
Why
The boundary of the firm sits where the two costs balance. Falling transaction costs — better contracts, better search — push work back out to the market, which is exactly what outsourcing and gig platforms are.
Practise Concept of the Firm
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