Definition of X Efficiency

It is the ability of a company to get maximum output from its input. These inputs can number of employees, machines etc.

Explanation of X Efficiency

Competition between firms will act as an incentive to increase efficiency and make sure firms use best combination of factor inputs. Firms compete under conditions of imperfect competition in order to maintain efficiency.

There are two theories in this regard: first is Neo-classical theory that states under perfect competition firms must maximize efficiency in order to succeed and make a profit; those who do not will fail and be forced to exit the market. Second is X-efficiency theory that states that under conditions of imperfect competition, firms may experience inefficiency.