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Assignment 1.

One of the central concerns of economics is the nature and functioning of both markets and non-market institutions like business firms or governments in allocating resources. In an important and influential article, the Nobel Laureate F. A. Hayek painted the virtues of the market as a mechanism of coordination in a vivid way. Writing in the context of a long-running debate about the efficacy of socialism, he argued that the market is superior to central economic planning because of the way it economizes on information and takes advantage of the localized knowledge of market participants.  In an equally important article, another Nobel Laureate, Ronald Coase, considered a related question: in a market economy, why are there non-market institutions like business firms? Why aren't all aspects of production carried out through market exchanges among independent workers?  In constructing his argument, Coase asserts (a) that the firm consists in the supersession of the price mechanism by administrative control and (b) that such supersession is often efficient because "there is a cost to using the price system."

Your assignment is to summarize the argument of the Hayek and Coase papers, and to consider the following question.  Is there a conflict or contradiction between Hayek's argument and Coase's argument?  If you think there is a contradiction, explain what it is.  If you think there is no contradiction, explain how the two arguments can be reconciled.

Your readings are the two original articles, both available online (and on your class CD).

You are welcome to consult (and cite) other works.  But don't get bogged down in research.  Concentrate on the ideas and on how you will frame your argument.

Due: February 3.



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