Transaction Costs and Equilibrium Prices : Markets and Firms as Twin Pathways to Pareto Optimality

Transaction costs foster the creation of (new) wealth through innovation and entrepreneurship, facilitated by "elementary contracts" – risky, non-traded agreements involving time-separated exchanges. However, the current price theory ignores these crucial realities. This research models the impact of these realities on equilibrium prices and the organization of economic activity. By bringing entrepreneurs and elementary production contracts to the forefront, it uncovers two routes to a Pareto-optimal state with economic rents: market-based production and firm-based production. The study delineates the firm's boundaries, highlights the price-effects of the economy's property rights infrastructure, and justifies limited liability and the economic dominance of public corporations