Question

What is X-inefficiency? How is it related to monopoly?

Answer 1

X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary. When there is this lack of incentives, the firm will not be technically efficient. A monopoly faces little or no competition. Therefore, it might be easy for the monopolist to make supernormal profits. Therefore, in the absence of competitive pressures, they may not try very hard to control costs and can earn a profit even if there is X-inefficiency.