Coase Theorem Essay Example | Topics and Well Written Essays - 500 words

Coase Theorem - Essay Example Ronald Coase stipulated that transaction costs that are found in the real world are not sufficiently low to create room for efficient bargaining, and thus an indication that the theory cannot be applied to reveal economic reality. Nevertheless, Coase theorem is regarded as the basis for economic analysis, especially in the event of government regulation when externalities are present (Walter, 2001). Based on the essay The Nature of the Firm, Coase offered an explanation as to why an economy comprises of various firms as opposed to a large number of independent and self-employed individuals who undertake contracts with each other. Since it is possible to undertake a transaction without the presence of any organization, Coase was puzzled on the appropriate conditions that should be imposed to facilitate for the emergence of firms (Walter, 2001). Today, most firms emerge when an entrepreneur begins to employ people. In this perspective, Coase considers the appropriate conditions under which it would be sensible for an entrepreneur to pursue for the help of employees instead of contracting out to facilitate for the completion of a certain task. While using the market, there are various transaction costs involved because the cost of acquiring a good or service through the market is above the usual price. Other additional costs comprise of those involved while searching for information, bargaining, policing, enforcement, and in keeping secrets of trade (Coase, 1988). All these costs significantly raise the cost of acquiring something from a different party. This reveals that firms emerge in order to internalize the production process to facilitate for the delivery of a product, and hence avoid these costs. Coase notes that a natural limit prevails that provides a limit as to the extent to which a firm should produce internally (Buchanan, 2005). Also there are times when a manager to an organization may make