ON ASSET FIXITY AND 'FARM PROBLEM'

Much of the criticism levied against the theory of asset fixity has been concerned with its normative implications (e.g., market failure, government intervention). In this paper, a model is developed, using a transaction-cost-bound concept of opportunity cost, that allows a more profound clarification of the controversy over the theory of asset fixity. Contrary to the conclusions of previous studies, the 'market failure' implication of asset fixity does not require hindsight or omniscience assumptions. Rather, it critically depends on a subtle but unrecognized hypothesis: transaction costs, though unavoidable, should and can always be reduced. Results suggest that those normative judgments are irrelevant unless the choice of appropriate reference points is carefully specified.