What is X-Efficiency?

X-efficiency is an economic term that refers to the ways that a company or business is utilizing its resources and labor to produce results. In an ideal situation, x-efficiency would be absolute, and the amount of output that the company produces would be directly related to the amount of input that it has at its disposal. If a business has a monopoly of a specific market, then it may lack in efficiency simply because it doesn't have any competition to force it to improve its methods. Yet even in competitive situations, some companies are more efficient than others because of the variable created by having human workers operating at different levels of effort.

The concept of x-efficiency is defined in contrast with its opposite, x-inefficiency. This theory holds that the less competitive the business, the more likely it is for the workers in companies within that business to lag off of their maximum proficiency levels. In other words, workers would trade giving full effort in favor of finding a comfortable working environment or better relationships with co-workers.

Monopolistic situations, in which one company stands alone within its specific industry, lead to sagging x-efficiency simply because the company has the luxury to get away with it. A business of this type is allowed to let cost control become more relaxed because it has no competition to challenge these rising costs. This business can also afford to be lax in its efforts to get workers to work to maximum effort; hence there is a resulting gap between the capabilities of this company and the actual results.

There are times, however, when a company's lack of x-efficiency can actually benefit the consumer public at large. For example, a company that doesn't need to devote all of its money and resources to a rigorous battle with competitors in the market may use it in other ways. The company may be able to invest in new technological advances that can yield new or improved products. This might technically cause x-inefficiency, but the results may actually both strengthen the company and be a boon to the society it serves.

When there is competition within a market, the theory of x-efficiency holds that the pressure of the situation should result in outputs that more closely reflect what a company has in terms of labor, resources, and capital. Yet even in situations like these, the inability of management to force its workers to work at the utmost levels creates inefficiencies. As this is the case, there is ultimately some disconnect between wages paid to workers and the effort they yield.