The Nature of the Firm (Ronald Coase)

Ronald Coase’s concept of "The Nature of the Firm" explains why businesses exist instead of all activities being left to the open market. Firms organize production internally to reduce the costs of negotiating and enforcing agreements with many external suppliers and customers—these are called transaction costs. By establishing a firm, owners can coordinate resources more efficiently and avoid repeated transaction costs, leading to economies of scale and stability. Essentially, Coase showed that firms are formed because they can be a more efficient way to produce goods or services compared to constantly trading in the open market.