Information about X Inefficiency
X-inefficiency is the difference between efficient behavior of firms assumed or implied by economic theory and their observed behavior in practice.
Economic theory assumes that the management of firms act to maximize owners' wealth by minimizing risk and maximizing economic profits -- which is accomplished by simultaneously maximizing revenues and minimizing costs, usually through the adjustment of output. In perfect competition, the free entry and exit of firms tends toward firms producing at the point where price equals long run average costs and long run average costs are minimized. Thus firms earn zero economic profits and consumers pay a price equal to the marginal cost of producing the good. This result defines economic efficiency or, more precisely, allocative economic efficiency.
Empirical research suggests, however, that a number of firms do not produce at the point where long run average costs are minimized. Some of this can be explained away by the mechanics of imperfect competition; what cannot be explained by traditional economics is described as X-inefficiency.
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Economic theory assumes that the management of firms act to maximize owners' wealth by minimizing risk and maximizing economic profits -- which is accomplished by simultaneously maximizing revenues and minimizing costs, usually through the adjustment of output. In perfect competition, the free entry and exit of firms tends toward firms producing at the point where price equals long run average costs and long run average costs are minimized. Thus firms earn zero economic profits and consumers pay a price equal to the marginal cost of producing the good. This result defines economic efficiency or, more precisely, allocative economic efficiency.
Empirical research suggests, however, that a number of firms do not produce at the point where long run average costs are minimized. Some of this can be explained away by the mechanics of imperfect competition; what cannot be explained by traditional economics is described as X-inefficiency.
Examples
- Monopoly
- A monopoly is a price maker in that its choice of output level affects the price paid by consumers. Consequently, a monopoly tends to price at a point where price is greater than long-run average costs. X-inefficiency, however tends to increase average costs causing further divergence from the economically efficient outcome. The sources of the X-inefficiency have been ascribed things such as overinvestment and empire building by managers, lack of motivation stemming from a lack of competition, and pressure by labor unions to pay above-market wages. X-inefficiency can also occur when monopolies or even oligoplies produce higher than the minimum average cost .
See also
References
- Harvey Leibenstein, "Allocative Efficiency and X-Efficiency," The American Economic Review, 56 (1966), pp. 392-415.
economy is the system of human activities related to the production, distribution, exchange, and consumption of goods and services of a country or other area.
The composition of a given economy is inseparable from technological evolution, civilization's history and social
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The composition of a given economy is inseparable from technological evolution, civilization's history and social
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For the television series, see Profit (TV series)
Profit generally is the making of gain in business activity for the benefit of the owners of the business...... Click the link for more information.
Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. According to the standard economical definition of efficiency (Pareto efficiency), perfect competition would lead to a
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The long run average cost (LRAC or LAC) curve illustrates - for a given quantity of production - the average cost per unit which a faces in the long run (i.e. when no factors of production are fixed).
LRAC curve is derived from a series of short run average cost curves.
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LRAC curve is derived from a series of short run average cost curves.
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In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. Mathematically, the marginal cost (MC) function is expressed as the derivative of the total cost (TC) function with respect to quantity (Q).
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Economic efficiency is a general term for the value assigned to a situation by some measure designed to reduce the amount of waste or "friction" or other undesirable economic features present.
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Allocative efficiency is the market condition whereby resources are allocated in a way that maximizes the net benefit attained through their use. Allocative efficiency refers to a situation in which the limited resources of a country are allocated in accordance with the wishes of
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In economic theory, imperfect competition, is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied.
Forms of imperfect competition include:
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Forms of imperfect competition include:
- Monopoly, in which there is only one seller of a good.
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monopoly (from Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service, in other words a firm that has no competitors in its industry.
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United States
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- Sherman Antitrust Act
- Clayton Antitrust Act
- Robinson-Patman Act
- Federal Trade Commission Act
- Essential facilities doctrine
- Noerr-Pennington doctrine
- Rule of reason
- European Community
competition law
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In political science, empire-building refers to the tendency of countries and nations to acquire resources, land, and economic influence outside of their borders in order to expand their size, power, and wealth.
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A trade union or labour union is an organization of workers. The trade union, through its leadership, bargains with the employer on behalf of union members ("rank and file" members) and negotiates labor contracts with employers.
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In economics, x-efficiency is the effectiveness with which a given set of inputs are used to produce outputs. If a firm is producing the maximum output it can, given the resources it employs, such as men and machinery, and the best technology available, it is said to be x-efficient.
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