X-Innefficiency

23 Jul

X-inefficiency

   While we are constructing average-total-cost curve, we assume that firms have the most efficient technology. In other words, the firm owns the technology that permits to achieve the lowest average-total-cost at whatever the quantity output is. X-Innefficiency is the failure of firm to produce any specific output at lowest possible average total cost.
Why does X-inefficiency occurs if it reduces firm’s revenue? The answer is that some entrepreneurs may have such goals as easier work time, corporate growth, avoidance of business risks or giving some jobs to their relatives that aren’t competent in performing them, so these causes may be in conflict with cost minimization. X-inefficiency also may arise when firm’s workers are poor motivated or under-supervised, also it happens when a firm is inert when it comes to making decisions about future business actions.
Question is where more likely X-inefficiency is prevailing: monopolistic or competitive industry? Firms in competitive industry are under pressure from rivals, so that they are forced to be efficient at production if they want to survive and get profit, but monopolists are protected from such competition and pressure by entry barriers, so that lack of this pressure may lead to X-inefficiency.
There is one general evidence that probability of X-inefficiency increases as competition decreases. Also, it is estimated that X-Inefficiency may be 10% or more of costs for monopolies and just 4% on average for oligopolies where four biggest firms produce more than 60% of total output.  There were a saying :” X-inefficiency exists and it’s more possible to be reduced when there is competitive pressure on firm rather than it is isolated”.
X-inefficiency graph
In the figure shown above, both costs are higher than minimum ATC, this implies that in this firm(industry) X-inefficiency exists, since the firm(industry) is operating at greater than lowest cost of a specific level of output. For Q1 ATC should be 1, but for Q2 ATC should be 2.

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7 Responses to “X-Innefficiency”

  1. caoimhelionheart July 23, 2012 at 6:18 PM #

    gives me chills of remembrance of Dr Dewey’s Economics class at UF. >.< well, I guess, I should go improve my X-inefficiency to my firm!

    • justdan93 July 23, 2012 at 6:22 PM #

      Better is to diminish it’s rate than to improve it, since it implies using resources inefficiently!

      • caoimhelionheart July 23, 2012 at 6:36 PM #

        =X which is WHY my major isn’t Economics. I leave that to you geniuses! =)

      • justdan93 July 23, 2012 at 6:40 PM #

        : ) Everyone has his own passion. Or something at which he/she wants or is good at!

  2. mattymillard July 23, 2012 at 8:38 PM #

    hey dan. I did some economics at uni, nearly broke my brain! Makes a bit more sense to me nowadays though 🙂

  3. chaldee July 24, 2012 at 12:41 AM #

    omg if only i found this blog during my last semester :O
    but I have to do more Economics, so it’s a good thing I found it now
    😀

  4. everettzkreynoldsf September 21, 2012 at 12:19 AM #

    Reblogged this on Everett Reynolds Blog.

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