Society with no firm : only product market ( consumers & factor owners are in direct contact )

Society with firms : factor market emerges, part of original market transactions is replaced by factor             market transactions � firm replaces / supersedes market

Ambiguities

- It's impossible to classify a transaction as a factor market transaction or a product market transaction ( shoe - shine boy )

- Under the piece - rate contract, it's hard to decide whether the production is coordinated by firm or market

To Cheung, as each transaction is a contractual arrangement, so it should be viewed as contractual supersession : the use of firms in coordinating resources is an optimal choice of contract

Reasons for the emergency of the firm : to decrease the TC of discovering prices

Coase : optimal firm size MB = MC

Cheung : the world is a firm ( from the view of contractual relationship )

Choice of contract : maximize gains from risk dispersion and minimize TC ( do the example discussed in class )

TC = 0 , choice of contract is indeterminate

Communist state is a big firm

REMARKS

1. TC = 0 , economic efficiency is guaranteed and all the problems are solved

After considering TC, the existing arrangements are the best ones and economic efficiency is also guaranteed. It 's no need to tackle the problems ( rent dissipation / externality / public good )

2. Three perspectives on an issue

-Traditional view

-Coase

-Cheung

Which perspective will be used depends on the information given in the questions