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What is x-inefficiency?

Relevant Topics

This question pertains to topics in Microeconomics, such as Market Structure, Efficiency, Monopolies

Definitions:

X-Inefficiency: X-inefficiency occurs when a firm produces output at a higher cost than is necessary. It happens due to the lack of competitive pressure, which can lead to operational inefficiency.

Detailed Explanation:

X-inefficiency arises when a firm is not maximizing its potential output under given input and technology. It can be caused by several factors including lack of competition, managerial slack, or organisational inertia. In perfectly competitive markets, where firms are price takers, there is significant pressure to minimize costs and be efficient to maintain profitability and survive. However, in markets with less competition, such as oligopolies or monopolies, firms can afford to be x-inefficient as they have some control over market prices.

Recent: 

National Rail in the UK: Prior to its privatisation, the national rail company in the UK was often criticized for being x-inefficient due to a lack of competition and inefficiencies in management and operation.

De Beers Diamond Monopoly:
For a long period of the 20th century, De Beers maintained a global monopoly on diamond mining and sales. During this period, it could be argued that the company exhibited x-inefficiency, since there was little competitive pressure to improve efficiency and reduce costs.

Summary:

X-inefficiency is a concept in economics that refers to the inefficiency in production that occurs when a firm does not minimise its costs. It is often present in monopolies or oligopolies where there is less competitive pressure to operate efficiently. Real-world examples such as the UK's National Rail and De Beers highlight how a lack of competition can lead to x-inefficiency. To reduce x-inefficiency, measures to increase competition or improve management practices may be necessary.

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