A primary advantage of organizing economic activity within firms is the:

• A. ability to reduce transaction costs through internal coordination
• B. guarantee of perfect competition in all markets
• C. automatic achievement of allocative efficiency
• D. elimination of all market failures

Answer: (A)

Verified step by step guidance

1. Understand the concept of transaction costs, which are the costs associated with making an economic exchange, such as searching for information, bargaining, and enforcing contracts.
2. Recognize that firms organize economic activity internally to reduce these transaction costs by coordinating production and exchange within the firm rather than through the market.
3. Recall that perfect competition and allocative efficiency are ideal market outcomes but are not guaranteed simply by organizing activity within firms.
4. Note that market failures, such as externalities or public goods, are not completely eliminated by the existence of firms; firms primarily address coordination and transaction cost issues.
5. Conclude that the primary advantage of organizing economic activity within firms is the ability to reduce transaction costs through internal coordination.