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Inefficiency

From Academic Kids

The term inefficiency has several meanings depending on the context in which its used:

  • Economic inefficiency refers to a situation where "we could be doing a better job," i.e., attaining our goals at lower cost. It is the opposite of economic efficiency. In the latter case, there is no way to do a better job, given the available resources and technology.
  • Productive inefficiency says that we could produce the given output at a lower cost -- or could produce more output for given cost. For example, a company that is inefficient will have higher operating costs and will be at a competitive disadvantage (or have lower profits than other firms in the market).
  • X-inefficiency refers to inefficiency in the "black box" of production, connecting inputs to outputs. This type of inefficiency says that we could be organizing people or production processes more effectively. Often problems of "morale" or "bureaucratic inertia" cause X-inefficiency.
  • Allocative inefficiency. Allocative efficiency theory says that the distribution of resources between alternatives does not fit with consumer taste (perceptions of costs and benefits). For example, a company may have the lowest costs in "productive" terms, but the result may be inefficient in allocative terms because the "true" or social cost exceeds the price that consumers are willing to pay for an extra unit of the product. This is true, for example, if the firm produces pollution (an external cost). Consumers would prefer that the firm and its competitors produce less of the product and charge a higher price, to internalize the external cost.
  • Pareto inefficiency. Pareto efficiency theory says that one person could be made better off without making anyone else worse off. In practice, this criterion is difficult to apply in a constantly-changing world, so many emphasize Kaldor-Hicks efficiency and inefficiency: a situation is inefficient if someone can be made better off even after compensating those made worse off -- even if the lonely hour of compensation never comes.
  • Resource-market inefficiency refers to barriers that prevent full adjustment of resource markets, so that resources are either unused or misused. For example, structural unemployment results from barriers of mobility in labor markets which prevent workers from moving to places and occupations where there are job vacancies. Thus, unemployed workers can co-exist with unfilled job vacancies.
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