What is X inefficiency?
X Inefficiency X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary. When there is this lack of incentives, the firm will not be technically efficient.
What is an example of X-inefficiency?
For example, a firm that employs brain surgeons to dig ditches might still be X-efficient, even though reallocating the brain surgeons to curing the sick would be more efficient for society overall. In this sense, X-inefficiency focuses on productive efficiency and minimising costs rather than allocative efficiency and maximising welfare.
What is an example of inefficiency in business?
Examples of X Inefficiency. Employing workers who aren’t necessary for the productive process. For example, a state-owned firm may be more concerned about the political implications of making people redundant than getting rid of surplus workers. Lack of Management Control.
What are some common examples of X-inefficient behaviour?
Some common examples of x-inefficient behaviour include businesses happy with satisficing profits, permitting a degree of organisational slack, and rising average costs of labour as wages rise or over-manning occurs The added complexity of businesses and senior and middle management with other aims such as the perks...
What is the meaning of X-inefficiency?
X-inefficiency is the divergence of a firm's observed behavior in practice, influenced by a lack of competitive pressure, from efficient behavior assumed or implied by economic theory. The concept of X-inefficiency was introduced by Harvey Leibenstein.
What is X-inefficiency in monopoly?
X-inefficiency. Typically we use the term x-inefficiency when analysing costs in imperfectly competitive markets such as monopoly, duopoly and oligopoly. X-inefficiency happens when a lack of effective competition in an industry means that average costs are higher than they would be if the market was more contestable.
What are some examples of economic inefficiency?
Anything less than $100 is considered an inefficient use of the machines. While this may seem pretty clear cut, this scenario does not take variables into consideration. One obvious example, would be the amount of labor needed to operate the machines in order to produce $100.
Which of the following statement is false with regard to X-inefficiency?
Answer: (b) It results from lack of adequate motivation.
What are the three kinds of inefficiencies?
Productive inefficiency, Resource-market inefficiency, and X-inefficiency might be analyzed using Data Envelopment Analysis and similar methods.
What is an inefficiency in economics?
According to economic theory, an inefficient market is one in which an asset's prices do not accurately reflect its true value, which may occur for several reasons. Inefficiencies often lead to deadweight losses.
What causes economic inefficiency?
In addition the existence of monopolies, the lack of fully developed markets (especially for capital and insurance), and gaps in the supply of information may result in inefficient resource allocation and yield savings and investment rates that are less than optimal.
What can cause inefficiencies in production?
Causes of inefficient production linesMachine quality and performance. Industrial robots and manufacturing equipment need to be in prime condition to work as efficiently as possible. ... Employee knowledge and performance. ... Product quality. ... Schedule gaps. ... Lack of sustainable processes.
What are the 4 types of efficiency?
There are several types of efficiency, including allocative and productive efficiency, technical efficiency, 'X' efficiency, dynamic efficiency and social efficiency.
What is social efficiency?
Definition of social efficiency. This is the optimal distribution of resources in society, taking into account all external costs and benefits as well as the internal costs and benefits. Social efficiency occurs at an output where Marginal Social Benefit (MSB) = Marginal Social Cost (MSC).
What do you mean by perfect competition?
Definition: Perfect competition describes a market structure where competition is at its greatest possible level. To make it more clear, a market which exhibits the following characteristics in its structure is said to show perfect competition: 1. Large number of buyers and sellers. 2.
What does a monopoly graph look like?
Monopolies have downward sloping demand curves and downward sloping marginal revenue curves that have the same y-intercept as demand but which are twice as steep. The shape of the curves shows that marginal revenue will always be below demand.
What is static and dynamic efficiency?
Static efficiency describes the level of efficiency at one point in time. Productive and allocative efficiencies are examples of static efficiency. Dynamic efficiency is concerned with new technology and increases in productivity, which causes efficiency to increase over a period of time.
What does allocative efficiency mean?
Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.
What is the concept of economies of scale?
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation (typically measured by amount of output produced), with cost per unit of output decreasing with increasing scale.
What is meant by dynamic efficiency?
Definition of Dynamic Efficiency Dynamic efficiency is concerned with the productive efficiency of a firm over a period of time. A firm which is dynamically efficient will be reducing its cost curves by implementing new production processes. Dynamic efficiency will enable a reduction in both SRAC and LRAC.
Overview
Mainstream economic theory tends to assume that the management of firms act to maximize profit by minimizing the inputs used to produce a given level of output.
Examples
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.
What does X inefficiency mean?
X-inefficiency happens when a lack of effective / real competition in a market or industry means that average costs are higher than they would be with competition.
What is the effect of patents on x-inefficiency?
Patents may lead to x-inefficiency, patents are legal barriers which prevent copying of names or concepts by rival firms these act as a barrier to entry meaning that new firms cannot enter/force existing firms to cut their prices or costs – there is no need for existing firms to cut costs. Economics.
What is X efficiency?
X-efficiency points to irrational actions in the market by firms. Traditional neoclassical economics made the assumption that companies operated in rational ways, meaning they maximized production at the lowest possible costs–even when the markets were not efficient. Harvey Leibenstein, a Harvard professor and economist, challenged the belief that firms were always rational and called this anomaly "X" for unknown–or x-efficiency. In the absence of real competition, companies are more tolerant of inefficiencies in their operations. The concept of x-efficiency is used to estimate how much more efficient a company would be in a more competitive environment. 1
Why is X efficiency important?
X-efficiency helps to explain why companies might have little motivation to maximize profits in a market where the company is already profitable and faces little threat from competitors. Before Leibenstein, companies were believed to always maximize profits in a rational manner, unless there was extreme competition.
When is allocative efficiency?
Allocative efficiency is when a company's marginal costs are equal to price and can occur when the competition is very high in that industry. Prior to 1966, economists believed that firms were efficient with the exception of circumstances of allocative efficiency.
Why is the x efficiency theory controversial?
The theory of x-efficiency was controversial when it was introduced because it conflicted with the assumption of utility-maximizing behavior, a well-accepted axiom in economic theory. Utility is essentially the benefit or satisfaction from a behavior, such as consuming a product.
Who challenged the belief that firms were always rational?
Economist Harvey Leibenstein challenged the belief that firms were always rational and called this anomaly "X" for unknown–or x-efficiency. Leibenstein introduced the human element, arguing that there could be degrees of efficiency, meaning that–at times–firms didn't always maximize profits 1 .
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Will Kenton has 10 years of experience as a writer and editor. He developed Investopedia's Anxiety Index and its performance marketing initiative. He is an expert on the economy and investing laws and regulations. Will holds a Bachelor of Arts in literature and political science from Ohio University. He received his Master of Arts in economics at The New School for Social Research. He earned his Master of Arts and his Doctor of Philosophy in English literature at New York University.
Does Leibenstein's theory depend on cost minimization?
Leibenstein concluded that the theory of the firm does not depend on cost-minimization; rather, unit costs are influenced by x-efficiency, which in turn, "depends on the degree of competitive pressure, as well as other motivational factors.". In the extreme market structure case–monopoly—Leibenstein observed less worker effort.
Summary
Overview
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 motivat…
Arguments about X-Inefficiency
Based on the assumption that the non-trade output of the firm is zero, Leibenstein argues that the X-inefficiency results from the lack of motivation of the resource owners to produce less than the maximum technical output of the trade goods. Leibenstein also argued that sometimes firms are not maximising their profits becuase there may be a certain level of efficiency, considering the human element which introduced by Leibenstein
Causes to X-Inefficiency
Through the study on two monopoly companies IBM and Xerox about X-inefficiency, Emily Nowlan stated four possible causes of X-inefficiency which led companies to decline. First, the company did not predict market trends before making decision and implementing actions. Second, the mismanagement of innovation and the waste of opportunities. Companies' negative behaviors when facing regulatory barriers are also the cause of X-inefficiency. Ultimately, wasting resource…
Examples
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 X-inefficiency have been ascribed to things such as overinvestment and empire building by managers, lack of motivation stemming from a la…
See also
• Inefficiency
• Government failure
• Government waste
• Pareto efficiency
• Productive efficiency