A Level Economics AQA Practice Exam

What is x-inefficiency?

1. Producing output with minimum costs

2. Producing at higher costs than necessary

3. Operating at maximum output

4. Reducing costs through technological advancements

The correct answer is: Producing at higher costs than necessary

X-inefficiency refers to the phenomenon where a firm produces output at higher costs than necessary due to a lack of competitive pressure or due to internal inefficiencies. This inefficiency often arises in situations where a firm has market power and does not face significant competitive constraints, allowing it to operate without needing to minimize costs effectively. In essence, x-inefficiency occurs when there is a disconnect between actual output and the most efficient production point attainable at the same level of resources. This can stem from various factors such as poor management practices, worker complacency, or outdated technology, all leading to higher operational costs without corresponding increases in output. Therefore, when firms do not face the incentives to reduce costs, they may not take the necessary steps to optimize production. This concept is particularly important in analyzing market structures like monopolies, where lack of competition can allow firms to become complacent, not striving for efficiency.