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Concept
X-inefficiency
Summary
X-inefficiency - is a concept used in economics to describe instances where firms go through internal inefficiency resulting in higher production costs than required for a given output. This inefficiency is a result of various factors such as outdated technology, Inefficient production processes, poor management and lack of competition resulting in lower profits and higher prices for consumers. The concept of X-inefficiency was introduced by Harvey Leibenstein.
The difference between the potential and actual cost is known as X-Inefficiency. In normal instances, a firm could have an average cost curve at potential AC, however due to inefficiency, its actual average costs are higher.
in 1966, Harvard University Professor Harvey Leibenstein first introduced the concept of X-inefficiency in his paper "Allocative Efficiency vs. X- Efficiency", which was published in American Economic Review. X-Inefficiency refers to a firms' inability to fully utilize its resources, resulting in an output level that falls short of the maximum potential achievable given the resources and environment which is referred to as the efficiency frontier.
More so, X-inefficiency focuses on the importance of competition and innovation in promoting efficiency and reducing costs for firms, followed by higher profits and better output and prices for consumers.
X-inefficiency pin out irrational actions performed by firms in the market.
The difference between the actual and minimum cost of production for a given output produces X-inefficiency.
Companies will incur X-Inefficiency as a result of lack of motivation to control its costs, which brings the average cost of production exceeds costs actually required for production. For example, the company have a potential potential cost curve. However, due to the lack incentive to motivate on control costs, the company's actual cost curve is at a higher position compared to the potential cost curve.
The phenomenon of X-inefficiency is in relation to the allocation of effort, especially the managerial effort.
Official source
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