Term: X-Efficiency
Type: Economic theory
Used in: Microeconomics, industrial organization
Introduced by: Harvey Leibenstein, 1966
Definition
X-Efficiency refers to the degree of efficiency a firm achieves under real-world competitive pressure, as opposed to perfect theoretical conditions. It measures how well a firm uses its resources, even if it has the potential to do better.
The concept suggests that companies may operate less efficiently when they face little competition, due to internal slack, complacency, or lack of motivation. X-inefficiency occurs when firms don’t minimize costs or maximize output — even with the same inputs.
Key Features
- Describes inefficiency within the firm, not market failure
- Happens when firms don’t feel pressure to perform
- Linked to monopolies, bureaucracy, or protected industries
- Emphasizes human factors like motivation, effort, and oversight
- Not the same as allocative or productive inefficiency
Common Use Cases
- Explaining inefficiency in monopolies or public agencies
- Supporting arguments for increased market competition
- Critiquing organizational slack and poor management
- Economic modeling of real-world firm behavior
Benefits or Advantages
- Highlights behavioral aspects of economics
- Explains gaps between theoretical and actual efficiency
- Useful in policy debates on deregulation and competition
- Brings attention to non-technical causes of waste
Examples or Notable Applications
– A monopoly firm may spend excessively or avoid cost-cutting
– Government agencies with guaranteed funding may lack urgency
– Deregulation of airlines in the 1980s improved X-efficiency
– Firms under threat of competition often become leaner and faster
External Links
This post is for educational purposes only and does not represent economic advice or regulatory policy.