X-Efficiency - Explained
What is X-Efficiency?
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Table of ContentsWhat is X-Efficiency?How is the X-Efficiency Theory Used? Academic Research on X-Efficiency Theory?
What is X-Efficiency?
X-Efficiency refers to the behavior, performance and efficiency that traders and firms maintain in imperfect competition. In a perfect market competition, elements of monopoly do not exist in the market and the prices of commodities are not controlled by individuals. Under perfect competition, firms and individuals are able to exhibit efficiency to the full potential which in turn cause them to make profits. In imperfect competition, the market structure tilts towards monopolistic competition and exhibit some features of competitive markets. The x-efficiency theory evaluates how inefficiency of individuals and firms is linked to imperfect competition.
How is the X-Efficiency Theory Used?
In 1966, Harvey Leibenstein introduced the x-efficiency theory. This theory focuses on how efficiency are maintained by individuals and firms under imperfect competition. In his paper published in 1966 titled; "Allocative Efficiency vs. 'X-Efficiency, Harvey Leibenstein extensively discussed allocative efficiency and non-allocative efficiency in the market. The degree of competition and the effects of competitive pressure on individuals and firms determine how efficient or inefficient they would be. According to Leibenstein, unit costs are significantly influenced by x-efficiency. Although, the x-efficiency theory evaluates the level at which efficiency is mniatian by individuals and firms under imperfect competition, there are certain drawbacks of the concept. The x-efficiency theory is regarded as a controversial theory because it antagonizes a popular economic theory; utility-maximizing behavior. Hence, there is a conflict between the acceptance of the acceptance of the x-efficiency theory over the utility-maximizing theory. X-efficiency is a concept that is applicable in diverse fields or disciplines such as bureaucracy, property rights, entrepreneurship, economic development and others.