The major criticism of monopoly has traditionally been that of the monopoly’s power in selling the good. The firm charges a price above MC (see diagram below, which is the same as Figure 11.6 on page 223 of the textbook). This is seen as allocatively inefficient because at the margin consumers are willing to pay more than it is costing to produce ( P > MC ); and yet the monopolist is deliberately holding back, so as to keep its profits up.
£ MC ( = supply under
perfect competition)
P
1
P
2
AR = D
MR
O Q
1
Q
2
Q
Equilibrium of industry under perfect competition and monopoly
(with the same MC curve)
Monopolies may also be inefficient for another reason: they may have higher costs. But why?
Higher costs may be the result of X inefficiency
1
(sometimes known as technical inefficiency ). Without competitive pressure on profit margins, cost controls may become lax.
The result may be overstaffing and spending on prestige buildings and equipment, as well as less effort to keep technologically up to date, scrap old plant, research new products, or develop new domestic and export markets.
Thus the more comfortable the situation, the less may be the effort which is expended to improve it. The effect of this X inefficiency is to make the AC and MC curves higher than they would otherwise be.
During the early 1980s, there were significant reductions in X inefficiency in many countries. With a world-wide recession, and a fall in both sales and profits, many firms embarked on cost-cutting programmes. Much out-of-date plant was closed down, and employment was reduced. Those firms that survived the recession (and many did not) tended to emerge both more competitive and more efficient.
Another factor causing a reduction in X inefficiency has been the growth in international competition. As markets have increasingly become global in scale, and as customs duties and

other barriers to trade have been reduced (see sections 24.3 and 24.4), so many companies are facing fiercer competition from abroad.
Questions
1. How might you measure X inefficiency?
2. Another type of inefficiency is productive inefficiency. What do yyou think this is? (Clue: it has to do with the proportions in which factors are used.)
1
This term was coined by Harvey Leibenstein, ‘Allocative efficiency or X efficiency’, American Economic
Review , June 1966.
2